Konferenca e Katërt Ndërkombëtare për Riskun

RISKMANAGEOBJECTIVE

Risk Manage Objective Trade Market Option Share Investing Investee Investor Debtor Creditor Bond Deviation Financial Instruments Inters Value Issuer Seller Buyer Bank Analyse Nonperforming Loans Price Economy Finance Globalization Effect Risk Manage Objective Trade Market Option Share Investing Investee Investor Debtor Creditor Bond Deviation Financial Instruments Inters Value Issuer Seller Buyer Bank Analyse Nonperforming Loans Price Economy Finance Globalization Effect Risk Manage Objective Trade Market Option Share Investing Investee Investor Debtor Creditor Bond Deviation Financial Instruments Inters Value Issuer Seller Buyer Bank Analyse Nonperforming Loans Price Economy Finance Globalization Effect Risk Manage Objective Trade Market Option Share Investing Investee Investor Debtor Creditor Bond Deviation Financial Instruments Inters Value Issuer Seller Buyer Bank Analyse Nonperforming Loans Price Economy Finance Globalization Effect Risk Manage Objective Trade Market Option Share Investing Investee Investor Debtor Creditor Bond Deviation Financial Instruments Inters Value Issuer Seller Buyer Bank Analyse Nonperforming Loans Price Economy Finance Globalization Effect Risk Manage Objective Trade Market Option Share Investing Investee Investor Debtor Creditor Bond Deviation Financial Instruments Inters Value Issuer Seller Buyer Bank Analyse Nonperforming Loans Price Economy Finance Globalization Effect Risk Manage Objective Trade Market Option Share Investing Investee Investor Debtor Creditor Bond Deviation Financial Instruments Inters Value Issuer Seller Buyer Bank Analyse Nonperforming Loans Price Economy Finance Globalization Effect Risk Manage Objective Trade Market Option Share Investing Investee Investor Debtor Creditor Bond Deviation Financial Instruments Inters Value Issuer Seller Buyer Bank Analyse Nonperforming Loans Price Economy Finance Globalization Effect Risk Manage Objective Trade Market Option Share Investing Investee Investor Debtor Creditor Bond Deviation Financial Instruments Inters Value Issuer Seller Buyer Bank Analyse Nonperforming Loans Price Economy Finance Globalization Effect Risk Manage Objective Trade Market Option Share Investing Investee Investor Debtor Creditor Bond Deviation Financial Instruments Inters Value Issuer Seller Buyer Bank Analyse Nonperforming Loans Price Economy Finance Globalization Effect Risk Manage Objective Trade Market Option Share Investing Investee Investor Debtor Creditor Bond Deviation Financial Instruments Inters Value Issuer Seller Buyer Bank Analyse Nonperforming Loans Price Economy Finance Globalization Effect Risk Manage Objective Trade Market Option Share Investing Investee Investor Debtor Creditor Bond Deviation Financial Instruments Inters Value Issuer Seller Buyer Bank Analyse Nonperforming Loans Price Economy Finance Globalization Effect Risk Manage Objective Trade Market Option Share Investing Investee Investor Debtor Creditor Bond Deviation Financial Instruments Inters Value Issuer Seller Buyer Bank Analyse Nonperforming Loans Price Economy Finance Globalization Effect Risk Manage Objective Trade Market Option Share Investing Investee Investor Debtor Creditor Bond Deviation Financial Instruments Inters Value Issuer Seller Buyer Bank Analyse Nonperforming Loans Price Economy Finance Globalization Effect Risk Manage Objective Trade Market Option Share Investing Investee Investor Debtor Creditor Bond Deviation Financial Instruments Inters Value Issuer Seller Buyer Bank Analyse Nonperforming Loans Price Economy Finance Globalization Effect Risk Manage Objective Trade Market Option Share Investing Investee Investor Debtor Creditor Bond Deviation Price

Konferenca e Katërt Ndërkombëtare për Riskun

EKONOMIA DHE SHOQËRIA RAJONALE PËRBALLË RISQEVE TË

PËRGJEGJËSIVE PUBLIKE

Qendra Shqiptare për Riskun

Ko

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Konferenca të organizuara nga QSHR:

Konferenca e parë: Hotel Tirana INTERNATIONAL, 18 Nëntor 2008, “Sfidat dhe risqet në Ekonominë shqiptare”.

Konferenca e dytë: Universiteti Luigj Gurakuqi, SHKODËR, 19-20 qershor 2009, “Ekonomia rajonale përballe sfidave të Intergrimit”.

Konferenca e tretë: Kompleksi Turistik SHARRI, Prizren KOSOVË, 10-12 mars 2011, “Ekonomia rajonale përballë krizës financiare”.

Konferenca e katërt: Dobrovnik, KROACI, 5 - 7 prill 2012, “Ekonomia dhe shoqëria ballkanike përballe risqeve të përgjegjësive publike”.

Fakulteti i Ekonomisë Qendra Shqiptare për Riskun Fakulteti i Ekonomisë dhe Agrobiznesit


KONFERENCA E KATËRT NDËRKOMBËTARE PËR RISKUT

EKONOMIA DHE SHOQËRIA RAJONALE PËRBALLË RISQEVE TË

PËRGJEGJËSIVE PUBLIKE

Qendra Shqiptare për Riskun

Dubrovnik, Kroaci7 prill 2012


Titull Ekonomia dhe shoqëria rajonale përballë risqeve të përgjegjësive publike.

B O R D I S H K E N C O R

Sherif BUNDO, Prof., Qendra Shqiptare për Riskun, Fakulteti i Ekonomisë, UT Sulo HADËRI, Prof., Dekan, Fakulteti i Ekonomisë, UT Bahri MUSABELLIU, Prof., Dekan, Fakulteti i Ekonomisë dhe Agrobiznesit, UBT Evelyne LANDE, Prof., IAE, Universite de POITIERS, Francë Jean Louis MALO, Prof. Universite Paris VIII, Francë Nazmi MUSTAFA, Prof., Kolegji Universitar Globus, Kosovë Evis KUSHI, Dr., Dekane, Fakulteti i Ekonomisë, Universiteti i Elbasanit Walter STOUKI, PhD, University of Geneve, Zvicër

B O R D I E D I T O R I A L

Gerdi LITO, Ms.F., Shkolla e Doktoraturës, Fakulteti i Ekonomisë, UT Rovena BAHITI, Prof. Asociuar, Fakulteti i Ekonomisë, UT Jean Luc MONDON, Maitre de Conference, AIE, Universite de POITIERS, Francë Ezmolda BAROLLI, Doktore e Shkencave, Fakulteti i Ekonomisë, UT Besnik KRASNIQI, Doktor i Shkencave, Fakulteti i Ekonomisë, UT Brunilda ZANI (DURAJ), Doktore e Shkencave, Fakulteti i Ekonomisë, UT Irini KALLUCI, Shkolla e Doktoraturës, Dep. Kërkimeve, Banka e Shqipërisë

Design, art grafik Edmond Çera

Botimi i këtij materiali u mundësua me mbështetjen e Bankës ProCredit, Shqipëri.

Shtëpia botuese

Qendra Shqiptare për Riskun falenderon dy partnerët e saj institucionalë, Fakultetin e Ekonomisë në Universitetin e Tiranës dhe

Fakultetin e Ekonomisë dhe të Agrobiznesit në Universitetin Bujqësor të Tiranës, për gadishmërinë, frymën e bashkëpunimit dhe inkurajimin që

bëjnë për studiuesit dhe punonjësit e rinj akademikë dhe pedagogjikë.

Një falenderim i posaçëm u adresohet gjithë pjesëmarrësve në këtë Konferencë, niveli i punimeve të të cilëve i ka dhënë Konferencës

statusin e një konference elitare në fushën e kërkimit shkencor për hapësirat ballkanike dhe europiane.

Table of contents

§ Financial and economic crisis in the region and in Albania ............................. 1

Sherif Bundo

§ The rise of the sovereign debt crisis: the particular case of Eurozone .............. 9

Nertila Xhelili

§ Determinants of growth in times of crisis: empirical evidence from Albania 23

Persida Spirollari

§ Total national debt and economic growth .......................................................... 31

Gerdi Lito

§ The economic crisis: Greece and Albania .......................................................... 41

Rovena Bahiti, Erjon Zoto,

§ Efficiency of collateral execution in Albania ...................................................... 53

Elsa Kristo

Konferenca e Katërt Ndërkombëtare për Riskun — QSHRviii

§ Impact of economic crisis on migration: evidence from Albania ................... 65

Perseta Grabova, Elona Pojani

§ Financing and investment opportunities in Southeastern Europe, before and after crisis ................................................................................................................ 79

Fjona Zeneli, Ina Sokoli

§ Solutions for financing public deficit of Albania ............................................... 93

Evis Gjebrea, Patris Poshnjari, Ermela Kripa

§ Risks in large scale projects management: Case of industrial parks development in Albania ..................................................................................... 105

Arbina Sotoni, Arjan Qefalia, Ezmolda Barolli

§ Strategies of economic development of Macedonia, the opportunity of involvement of the country in regional and world economic trends ........... 119

Harun Tairi

§ The importance of public funds, their management issues ........................... 131

Lorenc Kociu, Drita Luzo, Irena Boboli

§ The impact of global financial crisis on economic growth in Macedonia and the role of fiscal policy ........................................................................................ 141

Petrit Pollozhani, Luljeta Sadiku, Blerta Demishai

§ Public debt and the challenges of its administration in our country ....................151

Aurora Hoxha, Ines Dika

§ Audit problems of information system in public administration ................. 165

Gerta Gogo, Dori Risilia, Ina Pagria

§ Crisis and liquidity risk management in the banking sector: Albanian case ..........179

Brunilda Duraj, Juliana Imeraj, Elvana Moci

Table of contents ix

§ Impact of economic crisis in health care system in Albania .......................... 191

Enkelejda Avdi

§ Risk management in the telecommunication industry. Case study AMC ..........203

Glediana Foto, Elfrida Manoku, Valentina Sinaj

§ Impact of financial crisis on the profitability of sme in the Republic of Macedonia – pollog region................................................................................. 213

Rametulla Ferati, Aida Yzeiri, Elsana Ejupi

§ When to Retire, how is Recessions helping this process and how is the Social Security affected by early retirement ................................................................. 223

Fetije Gjaku-Murturi, Mustafë Murturi

§ Alternatives for improving management of the value chain for greenhouse tomato production in Albania ........................................................................... 235

Denisa Pipera, Ina Pagria, Bahri Musabelliu

List of figures

Figure 2.1 — 5 yr CDS as of 10 feb 2012 . Source Bloomberg. .................................... 14Figure 3.1 — GDP real growth rate. Source: Indexmundi.com .................................. 25Figure 6.1 — Bad loans December ‘10 and December ‘11. .......................................... 55Figure 7.1 — Do you prefer to study in Albania or abroad? (left) .............................. 71Figure 7.2 — Are you going to return to Albania after finishing your studies? (right) 71Figure 7.3 — Which of the following impacts of the economic crisis have affected

your family more? ..................................................................................... 72Figure 7.4 — Which of the following factors affect more the decision of Albanian

students to study abroad? ......................................................................... 72Figure 7.5 — Which of the following factors affects more the decision of Albanian

students to stay abroad after finishing their studies? ............................ 73Figure 7.6 — Are you considering returning to Albania after a few years?

Left: Respondents who are currently studying abroad Right: Respondents who are currently working abroad ....................... 74

Figure 7.7 — Which of the following impacts of the economic crisis have affected your family more? ...................................................................................... 74

Figure 7.8 — Which of the following factors affect more the decision of Albanian students to study abroad? ......................................................................... 75

Figure 7.9 — Which of the following factors affects more the decision of Albanian students to stay abroad after finishing their studies? ............................ 77

Figure 8.1 — Privatization revenues (cumulative, in per cent of GDP). Source: Transition report, 2009, EBRD. ................................................................ 81

Figure 8.2 — Gross average wage per month (in EUR). Source: Central banks

Konferenca e Katërt Ndërkombëtare për Riskun — QSHRxii

publications. ............................................................................................... 88Figure 9.1 — Net Public debt in % of GDP for Albania and the region. Source:

Ministry of Finance, own graph. ............................................................. 96Figure 9.2 — The public debt structure of Albania. Source: Ministry of Finance, own

graph. ........................................................................................................... 97Figure 9.3 — Left: Interest payment on external debt. Right: Interest payment on

external debt (% of exports of goods and services and income)(% of GNI). Source: World Bank, Global Development Finance .................. 99

Figure 9.4 — Debt brake rule. Source: Geier, A (2011), p. 14 ................................... 101Figure 10.1 — Main Industrial & Business Parks Risks. Source: Answers form Best

Practice providers, Manual of IBPs in the SEE Region, FIDIBE, 2010 ...110Figure 11.1 — Data (%) shown in a pie chart. ............................................................. 126Figure 13.1 — The effects of government expenditures to real GDP (Authors’

calculation). .............................................................................................. 148Figure 16.1 — Quarterly Liquidity ratio. Source: Bank of Albania .......................... 185Figure 16.2 — Loans / Deposits ratio, in total and separately in ALL and FC, 2006-

2011. Source: Bank of Albania ............................................................... 185Figure 16.3 — Volume of liquidity provided by the Bank of Albania in the open

market. ...................................................................................................... 186Figure 16.4 — Monthly liquid assets and liquidity. .................................................... 188Figure 16.5 — Liquid Assets by currency. .................................................................... 188Figure 16.6 — The structure of assets and liabilities by maturities. .......................... 189Figure 17.1 — Budget of Health Ministry for health care (as % of GDP). Sourse:

MOH, MPB -Programi Buxhetor Afatmesem 2012-2014 - Ministry of Finance. ..................................................................................................... 195

Figure 17.2 — Trend of health insurance expenditures from 2007 – 2014. Sourse: MOH, MPB -Programi Buxhetor Afatmesem 2012-2014. ................. 195

Figure 17.3 — The comparison of drugs’ expenditures from health insurance scheme, for 5 recently years. Source: HII, my calculations. ............... 197

Figure 21.1 — Conceptual Framework and Research Questions. ............................ 237Figure 21.2 — Vegetable Production Structure. .......................................................... 239Figure 21.3 — Value Added Supply Chain in the Study Area ................................... 243Figure 21.4 — Price Escalation of Tomato Production. ............................................. 244Figure 21.5 — Organization of Marketing and Supply Cooperative According to

Unique Management and Separate Ownership. .................................. 246Figure 21.6 — The purchase-sale relationship for fresh vegetables: the role of the

cooperative................................................................................................ 248

List of tables

Table 1.1 — Remittances in % to GDP, Source: UNCTAD. ........................................... 3Table 1.2 — Average rate of economic growth in the Western Balkan countries 1992-

2010. Source: UNCTAD, IMF (forecast 2011). ........................................ 3Table 1.3 — Unemployment rate 2010. Source: OECD. ................................................. 4Table 1.4 — Inflation rate 2010. Source: OECD ......................................................................4

Table 1.5 — Source: Association of Banks, November 2011. ........................................ 5Table 2.1 — 10 year government bond yields, as of 8 march 2012. Source Reuters. .. 16Table 3.1 — Model 1: OLS, using observations 1991-2010 (T = 20). Dependent

variable: l_GDP. .......................................................................................... 27Table 5.1 — Annual percentage of GDP - Greece, Albania.

Source: World Bank, November 2011. .................................................... 49Table 5.2 — Unemployment percentage - Greece, Albania

Source: World Bank, November 2011. .................................................... 49Table 7.1 — First Target group. ........................................................................................ 70Table 7.2 — Second target group. .................................................................................... 70Table 8.1 — Privatization revenues (cumulative, in per cent of GDP). Source:

Transition report, 2009, EBRD. ................................................................ 81Table 8.2 — GDP per capita (USD) in the SEE countries. Source: Countries’ national

banks............................................................................................................ 86Table 9.1 — Duration and average maturity in selected countries. Source: OECD

Central Government Debt Statistical Yearbook 1999-2008 and Ministry of Finance Albania. ................................................................... 98

Table 10.1 — Risks Assessment Criteria for the real estate development. Source:

Konferenca e Katërt Ndërkombëtare për Riskun — QSHRxiv

Khumpaisal and Chen (2009). ............................................................... 108Table 10.2 — Industrial Park Projects in Albania. Source: METE ............................ 112Table 11.1 — FDI in Macedonia 1997-2007. Source:State Statistikal Office of

Republic of Macedonia (www.stat.org.mk). ........................................ 125Table 11.2 — FDI through different sectors in RM. Source: State Statistikal Office of

Republic of Macedonia (www.stat.org.mk) .......................................... 125Table 12.1 — (Source: Data were collected by the control statements for the years

2005 - 2010 by the State Supreme Audit) ............................................. 133Table 12.2 — Economic damage in “wages and benefits” (in thousand LEK). Source:

Data were collected by the control statements for the years 2005-2010 by the State Supreme Audit. ................................................................... 135

Table 12.3 — Economic damage in “wages and benefits” (in USD). Source: Data were collected by the control statements for the years 2005 - 2010 by the State Supreme Audit .......................................................................... 135

Table 12.4 — The non accurate planning of funds (in million LEK). Source: The data were received by the control statements for the years 2005 – 2010 by the State Supreme Audit. ......................................................................... 136

Table 12.5 — The non accurate planning of funds (in million USD). Source: The data were received by the control statements for the years 2005 – 2010 by the State Supreme Audit. ......................................................................... 136

Table 12.6 — Economic damages during the procurement process (in thousand LEK). Source: The data were received by the control statements for the years 2005–2010 by the State Supreme Audit. ..................................... 136

Table 12.7 — Economic damages during the procurement process (in thousand USD). Source: The data were received by the control statements for the years 2005–2010 by the State Supreme Audit. ..................................... 137

Table 12.8 — Violation identified during the procurement process. Source: The data were received by the control statements for the years 2005 – 2010 by the State Supreme Audit. ......................................................................... 137

Table 13.1 — Fixed effects estimation. .......................................................................... 147Table 14.1 — Costs and risks for the simulated period .............................................. 160Table 14.2 — Costs and risks for the simulated period. ............................................. 160Table 14.3 — Costs and risks for the simulated period ............................................. 161Table 14.4 — Costs and risks for the simulated period. ............................................. 161Table 16.1 — Main items of assets of banking system. Source: Bank of Albania

(* in billions of ALL, ** in %). ................................................................ 186Table 16.2 — Main items of liabilities of banking system. Source: Bank of Albania (*

in billions of ALL, ** in %). .................................................................... 187Table 18.1 — Analysis of loans 2008 to 2009 Cosmote Group. Source: AMC financial

reports 2009. ............................................................................................. 208

List of tables xv

Table 18.2 — Sensitivity to interest rates for Cosmote Group 2008 to 2009. Source: AMC Financial reports 2009. ................................................................. 208

Table 18.3 — Report net debt / value of shares of Cosmote Group, 2008-2009...... 209Table 19.1 — Macroeconomic indicators in Republic of Macedonia. Source: www.

Economywatch.com. ............................................................................... 217Table 19.2 — Descriptive statistics. ............................................................................... 219Table 19.3 — Regression analysis. ................................................................................. 219Table 20.1 — Impact of Labor Market Conditions on Older Workers’ Labor Force

and Social Security Receipt (standard errors in parentheses) ........... 230Table 20.2 — Long-Term Impact of Labor Market Conditions on the Amount of Social

Security Received by Retirees (standard errors in parentheses) ...........232Table 21.1 — Construction of Production Facilities. .................................................. 240Table 21.2 — Information Regarding Consultancy about Vegetable Treatment. ... 240Table 21.3 — Information about Contacts with a Third Party. ................................. 241Table 21.4 — Information Related to Alternatives of Vegetable Production Sales... 242Table 21.5 — Information Regarding the Types of Agreements and Destination of

Sales. .......................................................................................................... 244

Preface

I nderuar lexues,

Libri që keni në dorë është produkt i një pune të veçantë, të një grupi studiuesish gjithashtu të veçantë, prezantuar një Konferencë specifike, të organizuar në Kroaci dhe dedikuar RISKUT. Libri është së fundi edhe një premtim i mbajtur prej organizatorëve të Konferencës.

Tradita dhe respektimi i saj janë ndër gjërat më me vlerë në jetën dhe aktivitetin profesional të botës akademike. U bënë disa vite që Qendra Shqiptare për Riskun, QSHR, në bashkëpunim të ngushtë me dy fakultetet më prestigjioze të fushës së ekonomisë, Fakultetin e Ekonomisë në Universitetin e Tiranës dhe Fakultetin e Ekonomisë dhe të Agrobiznesit në Universitetin Bujqësor të Tiranës, të bëhen promotorë të organizimit të një zinxhiri konferencash të përvitshme me fokus ekonominë, zhvillimin, rritjen ekonomike nën këndvështrimin e riskut. Risku, në pamje të parë, koncept virtual, është tashmë një parametër i matshëm, i prekshëm dhe matematikisht i vlerësuar, në gojën dhe fjalorin e akademikëve të rinj.

Ekonomitë e vendeve të rajonit janë të përafërta me njëra-tjetrën. Ato kanë vërtetë karakteristika ekonomike dhe sjellje të përbashkëta dhe të njëjta, që shfaqen si sjelljet e instrumenteve të veçantë në një orkestër gjigande, ndërkohë që kanë njëherësh edhe tingujt e tyre të veçantë dhe specifika. Pikërisht këto veçori janë bërë objekt i studimeve akademike të pjesëmarrësve në Konferencën e IV Ndërkombëtare për Riskun, të organizuar këtu në Dubrovnik të Kroacisë. Kaq afër dhe kaq larg njëherësh. Vështroni me kujdes nivelin e zhvillimit ekonomik dhe të rritjes të çifteve të vendeve të tilla si Shqipëri dhe Kosovë, Kroaci dhe Serbi, Bosnjë dhe Mali i Zi, Maqedoni dhe Bullgari. Janë fqinje, kanë mentalitete dhe kushte ekonomike dhe gjeostrategjike pothuaj të njëjta. Kanë diferenca të mëdha në zhvillimin ekonomik. Kanë diferenca

Konferenca e Katërt Ndërkombëtare për Riskun — QSHRxviii

edhe në shkallën e riskut. Kanë ritëm të ndryshëm të rritjes dhe të integrimit. Cilët janë faktorët? Ka një numër të madh faktorësh, të cilët nuk mund të thuhen dhe as të citohen nga një njeri i vetëm, aq më pak në pak rreshta.

Risku është boshti rreth të cilit vërtiten sjelljet individuale dhe vendimmarrjet financiare të të gjithë botës moderne. Riskut njerëzit i largohen natyrshëm në respekt të ligjeve të logjikës formale. Sa më i madh risku, aq më larg qëndrojnë sipërmarrësit, investitorët, subjektet me sjellje racionale. Sa më i ulët të jetë risku, aq më tërheqës është objekti, ekonomia, rajoni. Në këto kushte matja dhe vlerësimi i riskut kanë një vlerë jashtëzakonisht të madhe dhe peshë vendimtare në vendimmarrje. Njohja dhe vlerësimi i riskut bëhet natyrshëm busulla që orienton drejtimin e lëvizjes së fondeve, kapitaleve, energjive dhe inteligjencës. Këto konkluzione akademike dhe profesionale më imponojnë të shpreh një respekt dhe vlerësim të madh për të gjithë pjesëmarrësit në Konferencën tonë Ndërkombëtare, të katërt në llojin e vet. Rruga jonë e ka të qartë itinerarin e lëvizjes: nga Konferenca në Konferencë. Nga e katërta te e pesta e kështu me radhë.

Një falënderim të veçantë dëshiroj të shpreh për Stafin Drejtues të QSHR, ndër të cilët do të veçoja Gerdi LITO, Pedagog i Drejtimit të Portofolit dhe i Menaxhimit të Riskut, Rovena BAHITI, Ezmolda BAROLLI dhe Erion ZOTO, pedagogë të Informatikës dhe të teknikave të matjes dhe vlerësimit statistikor të riskut. Falenderoj njëherësh dy dekanët dhe profesorët Sulo HADËRI dhe Bahri MUSABELLIU, për mbështetjen, prezencën dhe pjesëmarrjen aktive si drejtues dhe si njerëz të botës akademike në këtë Konferencë.

Konferenca jonë do të vijojë edhe vitet që pasojnë. Përsëri për riskun. Përsëri me ftesë të hapur për studiuesit dhe kërkuesit e rinj, të cilët kanë fatin të jenë të rinj, kanë energjitë ngaqë janë të rinj, kanë epërsinë nga të qenit pedagogë, kanë mundësinë nga njohjet e gjuhëve dhe të kontakteve permanente me literaturën, që të jenë lojtarë të përhershëm të një debati që do ta dëshironin të gjithë, por që vetëm një pjesë kanë mundësi.

Punimet e Konferencës do të përcillen dhe do të bëhen të disponueshme për të gjithë publikun nëpërmjet botimit, e drejta e botimit dhe shumëfishimit të të cilave është e rezervuar vetëm për autorët dhe QSHR.

Sherif BUNDO

Profesor Drejtues Shkencor i Konferencës Tiranë, 31 tetor 2012

P A P E R S

RISK

OBJECTIVE

MA

NA

GE

Financial and economic crisis in the region and in Albania

Sherif Bundo

Professor, Faculty of Economics, University of Tirana

I consider very original the idea of the Albanian Center for Risk, that in collaboration with the Faculty of Economics of the University of Tirana and the Faculty of Economics and Agro Business of the Agriculture University of Tirana, have organized a conference for the situation of business and risk in Albania, during a time in which the global economy, especially the European economy, are deep into crisis. This is a global crisis. Today’s crisis is an economic crisis, it has shocked the real economy, the businesses that produce and offer services. Today’s crisis is a financial crisis; it has affected banks, investment funds and especially schemes and systems of social insurance. Today’s crisis is a psychological crisis, a crisis of confidence and trust. It has shocked trust, cooperation and well functioning of institutions created as a need for a mutual reaction towards common problems and difficulties. The crisis has raised questions and needs for review and solution for the ways agreements, trust institutions and markets should function. The crisis has affected the private life of the people, creating them problems. Shocks in the employment figures, lockouts and layouts, have put into doubt the guarantee for a job and revenues. This is crystal clear and is traduced in doubt and instability in family revenues, standard of living, a secure future.

Konferenca e Katërt Ndërkombëtare për Riskun — QSHR2

The actual economic and financial crisis is not a new phenomenon. We are already used to this mentality. Today in year 2012, we are very familiar to the term crisis. What is new today in 2012, for the Albanian economy and society, is connected to another fact: today business people, owners and managers of private companies, bankers and finance officers, economists and journalists and finally politicians and public sector managers, are more conscious than ever for the high level of risk an economic difficulties and the immediate need for a technical and professional management of these situations.

Which are the signs of the economic and financial crisis in the region? The Balkan region is a region with underdeveloped financial markets. But the Balkan region is not a closed one. Ways and channels of communication of the regional economy with the European economy and wider are numerous and very intensive. Banks are tunnels and highways that connect anywhere, everywhere, fast and with high intensity all the subjects that operate in economy, apart from industry, size, place, time or special circumstances. The characteristics of the economies of Balkan countries, as economies based on small businesses, small economies of relatively small countries, that can be easily managed, based more on real sector than on services and financial sector, do not make them immune to crisis.

Without trying to focus on deeper analysis, I need to underline the fact that the Balkan region is sit on the crisis table. Signs and arguments of this conclusion are numerous. It is not the object of this paper, but we can’t leave outside the focus of the analysis the macroeconomic and geographic environment or the crisis situation and intensity. In general, we can conclude that the crisis in our countries is present for many reasons, which are listed below:

First, the sensible fall of household consumption. It is a reflex of the people, a natural behavior because of what is called controlled behavior of people in time of crisis, a natural reaction because of fear. This has its own explanation. When people learn about the opinions and ratings of institutions and specialists, they always think for the future, and focus on saving. It results that consumption has fallen in our countries from 7% to 11,4 %. The increase of household and business deposits in the banks is both a parameter showing availability of liquidity by the banks but also that they have more obligations towards depositors, which means interest. This behavior brings pressure over banking institutions that asks for this capital to be employed, used, to serve crediting the economy. On the other side the economy is characterized from the decrease of growing rates, there is less need for funds, there are difficulties, decrease of turnovers, which brings decrease of confidence that banks have on businesses. Banks that are more exposed to risk, simply strengthen credit procedures and slow down their credit expansion.

Second, in our countries there has been a tremendous fall of remittances. Immigration and income from immigration have important weight in the economies of the Balkan region. They have served for many years as fuel that has made our “economy machine” work. All countries in the world have income from remittances,

Sherif Bundo 3

but the characteristic in our Balkan countries, is that income from immigration have always had an important role in the economic equilibriums. This phenomenon is stronger in Albania, Bosnia and Kosovo. But it can’t be left apart also in other countries. The fall of remittances has worsened the household balances, which is reflected in the fall of household consumption, and on the other side has worsened the situation on the balances of payments. In recent three years, income from immigration has fallen on average 12-29 %.

Table 1.1 — Remittances in % to GDP, Source: UNCTAD.

Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Albania 18.56 11.89 16.42 17.20 16.51 15.60 15.89 15.81 14.97 13.50 11.40 10.61 8.82

Bosnia 48.41 40.62 35.50 31.80 27.21 24.64 20.68 18.98 17.59 17.82 14.87 12.99 10.75

Croatia 2.48 2.42 3.00 3.27 3.35 3.20 3.00 2.75 2.52 2.38 2.31 2.34 2.11Serbia– Montenegro* 5.11 7.12 10.13 11.54 11.10 10.99 14.31 15.15 13.26 10.20 9.53 10.62 9.5

FYROM 1.77 2.08 2.26 2.14 2.79 3.75 3.97 3.90 4.18 4.36 4.52 4.60 4.60Average of the region 15.26 12.83 13.46 13.19 12.19 11.64 11.57 11.32 10.50 9.65 8.53 8.23 8.23

*In the row Serbia & Montenegro the figures are up to 2008, after this year they represent only Serbia.

Third, there has been slowdown of economic growth, growth of unemployment, fall of investments and increase of inflation rate. It is not typical of Balkan countries to have low economic growth rates. In fact, in almost all these countries, the annual rate of GDP growth for the crisis period in Europe (2008-2011) shows a considerable fall, but not in the same time. Because of the relatively low level of development of the capital markets in the Balkans, and because of the individualities of these economies (meaning economic structures and also in a currency meaning) the degree of the effects of the crisis in economic growth in the first years of the crisis has been weaker. For years 2000-2009 the Western Balkan countries experienced an economic growth of 3.60 %, as a group, while for the almost 20-year period from 1992-2010 they experienced an average economic growth of 4.15 % per year. The figures of the year 2010 and after show for a slowing down trend mostly because of the effects on the economies of these countries of the crisis. Actually, it has affected all the countries.

Table 1.2 — Average rate of economic growth in the Western Balkan countries 1992-2010. Source: UNCTAD, IMF (forecast 2011).

Period 1992 - 2000 2000 - 2009 1992 - 2009 2010 2011, forecastAlbania 6.35 5.67 6.17 3.5% 2,2 – 2,8 %Bosnia 21.47 1.10 7.55 0.8% - 1 %Croatia 3.52 3.89 3.67 -1.37% -1 – 1,5 %%


Serbia –Montenegro* -0.16 4.17 1.26 1.76% 1.20 – 0.4 %

FYROM 1.27 3.18 2.12 0.7% - 1 %Montenegro - - - 1.07% 0,4 – 0,8 %Average 6.49 3.60 4.15 1.076% 0,3 %

The annual rate of economic growth for 2011 is even lower. Although not yet public, the final figures of this parameter clearly show that forecasts of international institutions like the World Bank or the IMF can be used with a high level of confidence.

The relatively worsened level of the economies can be revealed also by the level of unemployment. The Balkan countries have a high degree of unemployment. In Macedonia, Bosnia and Serbia, unemployment is a big issue. But also it is a big issue more than in other countries in Kosovo. Referring to the media, it strikes 40% of the active population, while according to the official agencies it is about 32%.

Table 1.3 — Unemployment rate 2010. Source: OECD.

Period 2010 Forecast 2011Albania 13.49% 17.60%Bosnia 29.2% 32.4%Croatia 16.8% 19.8%Serbia 27% 29%FYROM 32% 34,5%Montenegro 20.3% 22.2%Average 23.13% 26.27%

Table 1.4 — Inflation rate 2010. Source: OECD

Period 2010 Forecast 2011Albania 3.6% 1.7%Bosnia 3.1% 4.3%Croatia 1.3% 1.9%Serbia 10.3% 8.1%FYROM 1.6% 2.1%Montenegro 3.4% 3.1%Kosovo 3.5% 4.1%Average 3.87% 4.15%

Fourth, the growth of the percentage of the bad loans is a parameter that shows a real worry and measures perfectly the fact that the economy is in difficulty. Below is a

Sherif Bundo 5

general view of the classification of loans in our banking system. There are about 25% of loans classified from substandard to others. The message of these figures is clear. A considerable number of borrowers have lost their full ability to repay loans normally, mostly because of the economic and financial difficulties.

Table 1.5 — Source: Association of Banks, November 2011.

Loans (million lek) In % to totalStandard loans 370,144.55 67.63%

Followed up 41,230.13 7.53%

Substandard 50,497.06 9.23%

Doubt 21,638.72 3.95%

Default 29,432.02 5.38%

Others 34,334.21 6.27%

Total 547,276.69 100 %

Fifth, the worsening of public revenues and the growing of the budget deficit is another problem that expresses the fact that the economy is in difficulty.

The budget deficit is a known problem for the actual crisis, not only for our Balkan countries. The economic slowdown has provoked also the decrease of revenues in the respective budgets.

Sixth, there are interferes and the high degree of affect of the regional Greek and


Italian crisis in the regional economies. Not only the Albanian economy but also the Macedonian economy, have a lot of connections and communication with the Greek economy. Without doubt the difficulties of the Greek economy and it deep financial crisis have the tendency to affect these to economies. But also the Italian economy has difficulties and affects other countries of the region like Montenegro, Croatia, etc.

Seventh, it is clear the aggravation of public communication of politics with the electorate, of the politic factors with each other, but also of the media with the public. The vocabulary used is harsh, reciprocal charges and disputes have grown, and there have been political and media attacks to institutions that are not directly connected to the economy like courts, justice organs, media, etc; we are speaking for a political environment that is not calm, causing also people and business not to be calm for the future.

To have a more complex and clear view on the numbers of the private subjects and the creative spirit of the people of these countries, we calculated a measure that shows the number of habitants for a business. Based on the 2011 Census in Albania there are about 100 000 active businesses. Meanwhile in 2010, a year ago, we had about 129 000 subjects registered as business activities. This means that the number of businesses that are not reported as active by the entrepreneurs is very high. There is a conflict between the numbers of business subjects registered by the entrepreneurs with that reported in the Census. The registration is obligatory. At the startup no business can begin the economic activity without being registered at the QKR.

Indexes All producers Producers of goods Producers of services

Years 2007* 2008* 2009 2007* 2008* 2009 2007* 2008* 2009

Basic Data

Number of enterprises 62,657 69,044 73,702 10,510 11,219 11,760 52,147 57,826 61,941Average annual number of employed people 222,637 239,626 251,800 105,606 113,354 114,419 117,031 126,272 137,381Average annual number of employed people paid 153,589 165,095 172,032 94,312 101,468 101,500 59,277 63,627 70,532Total employed people, end of year 226,616 240,391 252,226 109,236 113,718 114,633 117,380 126,673 137,592

Women 67,267 67,502 69,441 33,955 33,478 33,644 33,312 34,024 35,798

Self-employed 69,757 74,683 79,993 11,918 11,962 12,925 57,839 62,721 67,069

Paid employed workers 156,859 165,708 172,232 97,318 101,756 101,709 59,541 63,952 70,524

Turnover (million lek) 890,631 1,082,426 1,149,470 310,114 408,957 434275 580,517 673,468 715,195Turnover/unit (million lek) 14.214 15.677 15.596 29.507 36.454 36.928 11.132 11.647 11.546

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***

From all this view we can easily conclude that the financial and economic crisis is also present in the Balkan countries. When we say that an economy is in crisis this means first that the real economy, or private businesses operating in the economy, are in difficulty. This is an easy conclusion, but of great importance.

Why should we read it in the right way and with objectivity concerning the situation in an economy in crisis?

First, we want to improve the degree of self-evaluation and analysis of the real situation of businesses. The crisis is a systematic risk that influences and threatens the economic activity of all the subjects that operate in the country. In this way, the real understanding of facts requests from all the entrepreneurs, investors, merchants, business societies and chambers of commerce, to be conscious that the crisis is in a certain way an epidemic disease that has affected all of us without exclusions. Of course the degree of effects of the crisis on business activity and its intensity are different in various businesses. This depends on a large number of factors that have to do with the sector where a business operates, with its structure, with diversification in other activities, and finally with what sources of financing it uses to finance its activity.

Second, the crisis must be known and evaluated, so that businesses can react, to take the necessary measures to reduce the negative effects of exposure to the crisis. Of course businesses, entrepreneurs, owners and managers of private businesses in our country have their reflexes and also instruments to react to crisis and difficulties. But not all know them. The crisis is a result of the effect of a complex of factors, which request a minimum of technical and professional expertise to be known and analyzed. Crisis test the managerial skill and intuit for business of businessmen.

Third, understanding of the crisis and the full evaluation of its effects is often connected to the fact that often the reaction should be in block. Businesses that have difficulties because of business life cycle such as construction sector in our country, have other problems compared to businesses focused in the food sector or businesses focused on tourism. However the reaction and lobbying should be in group. Often politicians and even media or sometimes businessmen treat the problems deriving from crisis as standalone or one-sided. To face the crisis it requests a high interaction degree between the public and the private sector. Clever public policies are those who


consider private business as their partner. An active private sector that develops and grows quickly is a good basis for a strong and consolidated state budget and a business in difficulty needs an encouraging environment and public help through fiscal or administrative incentives.

Fourth, the actual crisis is a tool for projecting future actions and activity. It is known practice to abuse during crisis but is also known practice that in time of crisis there are a certain limited number of businesses that grow fast. This is not typical for crisis. Typical in time of crisis is the fact that activity is reduced, sales are down, debt increases and things get worse. But signs of an economy in crisis do not show in a single day. Crisis is never a product of a single decision and getting out of crisis also is not a single act.

Do businesses have tools and instruments of reaction to crisis? This is another topic. Of course that answers to this question require information of technical, professional, legal, financial and time character.

Businesses have in their hands ways and tools of reaction against negative effects of crisis. But we should not forget that reactions should and can come in time. A bankrupt business or in the road to bankruptcy is a business in extreme difficulty and as everything that is extreme can not be solved or helped with mechanisms of soft intervention.

We naturally think about some important conclusions from the management science and economics science world that deal with crisis, risks, and follow their performance and their rules. The management of a business when the economy is in crisis is a professional problem. Logically we would see as a solution the growing degree of reflection from private businesses and their representative societies to the division of ownership from management. To be an owner and to be a manager are two different sides of interest: professional interest and ownership interest. We think that in Albania time has come for new and experienced owners in the Albanian world of business to try to enter in their businesses new contemporary concepts regarding management and professional decision making.

It is my opinion that all the papers of this conference will complete the spectrum of risk analysis, evaluation of the degree of importance of situations in which our businesses are, and raising of propositions and finding the ways to get out of the crisis with less pain.

RISK

OBJECTIVE

MA

NA

GE

The rise of the sovereign debt crisis: the particular case of Eurozone

Nertila Xhelili

Monetary Operations Department, Bank of Albania@: [email protected]

AbstractDuring the last years the world has focused on fighting the global economic crisis

and this has had implications for the public finances. Especially in the Eurozone, a monetary union without a fiscal one, there have been many developments since the first problems of Greece in 2010.

Two years after, all the Eurozone countries have been put in the spotlight with global investors doubting the economic power of the european sovereigns to fix their finances and the private sector as well. In this economic reality where trust is what keeps the markets functioning, sovereign debt has lost some of the charm, bringing to life a massive sovereign debt crisis.

This paper tries to analyze what happened in eurozone on the way to 2012 and how did the sovereign risk spread. With the sovereign debt crisis being the main theme for the new year, it discusses the impact on the eurozone countries and the survival of the euro as well.

Keywords: sovereign debt crisis, convergence, fiscal compact, budget deficit, imbalances.


Just as the world thought the global crisis was left behind and the impacted economies were slowly creeping into positive territory, new alarm bells started ringing for Europe. Bad news hit the markets in early 2010, greek public finances were suffering the consequences of unreasonably high goverment spending. Suffering a recession since 2008, after all the turmoil it brought in the financial markets and many european leaders meetings, Greece received a 110 billion euro rescue package from European Union and IMF. The bailout was supposed to avoid a greek default, help the greek government get the house in order and above all restore market confidence in a united and strong eurounion. That was May 2010, when people everywhere knew that there was a greek debt crisis. What else happened since then? And what makes this a special debt crisis, when history has shown that it does happen rather frequently for world governments to spend more than they can afford.

1 The rise of sovereign debt crisisEurozone is a monetary union of 17 countries under the same central bank

but it is not a fiscal union, pooling together economies of large divergences. The Maastricht Treaty made preliminary provisions for the convergence stating that to enter the economic and monetary union (EMU), among other criteria, government deficit should not exceede 3% of GDP and gross government debt should not be more than 60% of GDP (Afxentiou 2000). As of march 2012, considering the more active sovereign debt issuers, only Finland fullfills these criteria (Bloomberg). The issue with the treaties is that none of them includes provisions for the exit of one of the countries, meaning the EU wasn’t even thinking it could get trapped into this kind of situation. Each of them has a unique economic profile but all were joined in one of the most severe debt crisis. This section goes through the main developments in eurozone countries1, analyzing the roots of the problems for each of them.

Greece was the typical case that suffered after a long period of rising government spending and public sector wages. After the first bailout, it was given another 109 bln euro in July 2011, which was later (october) enhanced to 130 bln euro. New austerity measures came along and private holders of greek debt had to agree to a restructuring of greek debt and a “haircut”, otherwise there would be a default. Since then, amidst Trojka reviews, political rumours in the greek parlament, revolts of greek people and rich rethoric from the international arena, Greece worries have been present. Being in a recession for five consecutive years2, with a high unemployment rate and severe austerity measures, the success of the bailouts is still to be seen and largely doubted. At least, Greece has avoided uncontrolled default, for the time being.

The next country to need a 85 bln euro bailout was Ireland in september 2010. Once hailed as the Celtic Tiger, because of the rapid economic growth until 2007, it

1 Focusing on the major ones that are active issuers of debt. This leaves out; Malta, Cyprus, Estonia, Luxembourg, Slovakia.

2 4 up to now, same expected for 2012.

Nertila Xhelili 11

suffered a housing bubble that crashed, pulling along the banks that financed it. Being shut out of the international markets, refinancing got very difficult for the banks so Ireland had to guarantee the six biggest banks. After three years of guarantees, reaching 32% (BBC 2010) of the GDP, the bailout became necessary. The good news is that Ireland is now on track with the bailout programme and plans are to return in the market later this year

Portugal was given 78 bln eur in may 2011. This will allow it to stay off the markets for a couple of years and in the mean time implement economic measures to support long term growth. Overspending, rising budget deficit and too many public servants brought Portugal on its knees. There hasn’t been any bubble and crash in Portugal, only the gradual loss of competitiveness because of rising labor costs. When the crisis stuck, Portugal found itself loaded in debt that got difficult to refinance in a market that was betting on Portugal needing a bailout. Still now, many believe that Portugal’s debt is not sustainable in the current environment and it will need a second bailout. The problem with beliefs, even irrational ones is that as soon as rumours get stronger, the markets itself can bring Portugal down again, leaving no other option than ask for a second bailout.

The other countries to enter alertzone were Italy and Spain, whose 10 year bonds reached the critical 7% yield, considered the level that makes the debt burden unsustainable because around this level, the other countries had to ask for a bailout.

Spain had a real estate bubble which then exposed the weakness of the spanish banking system, inlcluding some of the cajas3 that had to be bailed out as well. Besides this, Spain also has very weak fundamentals, most famously heavy unemployment. It has the highest jobless rate in the euro area (near 23%). As of january 2012, 1 out of 2 young people are unemployed in Spain.4

Italy’s public debt is too big (120.1 % of GDP, Bloomberg feb 2012), second only to Greece in eurozone. While the deficit is somewhat smaller than some other countries, Italy really is the big elephant in the room because it would be very hard, or even impossible, to bail out Italy. Same as other southern countries, wage levels rose quickly undermining its competitiveness which along with slow growth and ageing population have taken government debt to levels that economy cannot support. The difference is that italians didn’t go through a property bubble-crash, like the spaniards or irish, and the debt of Italy as a country- not just government debt- is actually smaller than for other countries like France or UK5. Government debt has always been in high levels but the issue is that now Italy is paying high costs to finance debt payment.

Slovenia had to bail out a banking system full of non-performing loans. The small

3 Otherwise known as savings banks, their original aim was to create the habit of thrift amongst the very poor but they have evolved to compete with and rival commercial banks- Wikipedia.

4 Business week <http://www.businessweek.com/news/2012-01-29/spanish-unemployment-rises-to-15-year-high-of-22-9-economy.html>

5 BBC, <http://www.bbc.co.uk/news/business-15429057>.


but very open economy, it’s export oriented and being vulnerable to the european issues, slided in a recession. Even in the worst case sceanorio, Slovenia is a small economy which can be bailed out in the blink of an eye, if needed. The problem are bigger, indebted countries which might be too-big-to-bail.

Belgium also had to bail out banks, especially Dexia, first because of the crisis and again in 2011 when it was shut out of financial markets. A historically high debt to GDP ratio, guarantees of the banking sector and months of political instability increased the size of the public debt.

Germany is the largest and strongest economy in Eurozone. It is the benchmark and the so called safe-haven bcs when risk sentiment goes off, all the money flows to Germany, lowering thus yields and cost of debt for the german government. This doesn’t happen bcs people believe germans are better workers or more respectful citizens but bcs Germany does have strong fundamentals. The debt to GDP ratio is high at 85.5% (Bloomberg, feb 2012) but Germany has built a strong trade surplus over the years. Being careful, german wages have increased less than EU average the last years, making it even more competitive in international markets.

Netherlands is noted for stable debt metrics, a core country in eurozone and the nearest one to Germany in market trading. According to the latest Index Mundi data, the dutch economy is noted for stable industrial relations, moderate unemployment and a sizable current account surplus. After long years of growth, the economy-highly open and dependent on foreign trade and financial services-was hit hard by the global economic crisis. The dutch banking sector was exposed to the US subprime crisis and the government was forced to nationalize a few banks, avoiding thus a financial collapse.

Finland has low levels of debt and small public deficit, one the the rarest countries that actually complies with the treaty rules but as S&P (2011) evaluated it’s not an isolated economy and its banks rely on outside funding which can get nasty if the crisis is prolonged. Besides this, one of the most serios issues is an aging population. Some of the other EU countries have this problem as well but Finland is getting hit earlier and harder (Laine& Maivali, 2010), facing multiple issues on the labour market, economic growth potential and public finances.

Austria has exposure to central and eastern europe banks (especially Hungary) but stable debt metrics. It’s not rated AAA by S&P anymore. Governor Nowotny dismissed rumours about Austria issues as “widly exaggerated”6 but also added that all the positive feelings assumed that “Euro-region debt contagion is not likely to produce a crisis in eastern Europe as great as the area suffered in 2008-2009”. Austrian banks have been expanding business to these countries, which in a certain way has shielded it from western woes but has now begun to have an increasing number of nonperforming loans.7

6 Bloomberg, <http://www.bloomberg.com/news/2011-11-23/nowotny-dismisses-fears-of-austria-east-europe-exposure-ft-says.html>

7 Stratfor, <http://www.stratfor.com/analysis/austrian-banks-limit-exposure-central-eastern-europe>

Nertila Xhelili 13

France has high debt to GDP and banks exposed to Greece and Italy. The treasured AAA rating was finally downgraded by S&P in january amidst fears that fiscal measures were not sufficient to reach budget deficit targets. With the market pricing a downgrade since summer, the downgrade was already incorporated in the french-german bond spreads before the actual movement.

For all of the above countries, budget deficit and debt levels have increased either because of thoughtless government spending, recession or banking sector support. In some cases even a combination of all these factors. If we try to classify them into groups, we notice:

■ countries that had unreasonable government spending (Greece, Portugal)

■ countries that experienced a property bubble and later a crush (Ireland, Spain)

■ countries that went down mainly because of the banking system (Belgium, Slovenia)

■ countries with weak debt metrics and exposed to weaker countries (France, Austria, Italy)

■ core countries, considered more stable than the peers (Germany, Netherlands, Finland)

2 What did the sovereign debt crisis bringAs of the latest data, Eurozone unemployment hit record high of 10.7 pct in

january, inflation 2.7% pct yoy in february and GPD growth in Q4 2011 is -0.3% qoq, 0.7% yoy. There is a large divergence between debt-sticken Greece and export-driven Germany. This is the economic picture of eurozone as a whole but the problems run much deeper and through many channels, raising important questions for each country and for the eurozone as a union. To summarize the effect of the crisis, it is important to mention the following findings.

2.1 Credit standards have tightened

According to BIS (Avdjiev, Schrimpf, Upper, 2012, pp 15) “Cross border claims, the aggregate of internationally active banks declined during the second quarter of 2011, mainly as a result of a decrease in lending to developed economies.” The ECB lending survey (jan 2012) also acknowledged the tightening of credit standards in Q4 2011, by the adverse combination of a weakening economic outlook and the euro area sovereign debt crisis, which continued to undermine the banking sector’s financial position. The tightening appeared to be widespread across larger euro area countries, with the notable exception of Germany.


2.2 Risk appetite has decreased

Markets have been very volatile between lots of news, rumours, summits and mood swings. If we look at CDS as credit risk proxies, they have exploded the last years. 5 year CDS of Greece are the highest, implying a nearly certain default. The next are Portugal and Ireland but Ireland CDS have started to fall again, accepting the positive effect of the reforms.

There is a gap between Austria and France and the four full AAA countries, that didn’t start when they were downgraded but has been there since speculation about their fundamentals begun. Another indicator of the safe haven bid was strong buying of Germany. End of 2011, german securities up to 15 month were trading at negative yields. German and dutch goverments sold treasury bills at negative yields, meaning investors were paying these two goverments to take their money. Sounds absurd buying bills from the treasury at a higher price than the one that treasury will pay back at maturity. History shows it did happen, happens everytime investors don’t want to put their money in countries they don’t trust.

Figure 2.1 — 5 yr CDS as of 10 feb 2012 . Source Bloomberg.

2.3 The rise and “fall” of the credit rating agencies

The role of credit rating agencies has increased gradually, becoming one of the biggest players in the markets. In a financial world where investors rely primarily on ratings, they have become extremely powerful because the credit rating determines access to funding markets and the cost. Kiff, Novak and Schumaher in 2012 found that although upgrades and downgrades in general do not have a significant impact on CDS spreads, upgrades and downgrades in and out of investment grade categories are statistically significant.

Rating agencies have been in the spotlight, often criticized that they are ahead of the

Nertila Xhelili 15

curve, making the markets follow their patterns. Suggestions are they should be more careful and include forward looking evaluations about macroeconomic scenarios. Political leaders too have demanded that agencies be better judges and not fuel panic. IMF concluded (Kiff, Nowak and Schumacher, 2012) that their opinion does have an impact in the cost of funding of sovereign issuers, becoming a concern for financial stability. Judging ratings as a lagging indicator of credit risk and sometimes not even a fair one, institutional investors have already started to build in-house models for credit risk evaluation that make them less dependent on rating agencies. The news from this crisis is that change is happening, step by step.

2.4 Banking sector contagion

Some of the europian banks had to be bailed out before but the debt crisis brought additional problems for them. Davies&Ng (2011) summarize the four main channels through which issues in sovereign creditworthiness negatively affect bank funding conditions: direct losses on sovereign holdings, lower collateral values for wholesale and central bank funding, reduced funding benefits from government guarantees and depressed bank credit ratings.

The other issue is that bank-based economies, like nearly all of eurozone countries, recover significantly slower than market-based economies (Allard&Blavy 2011). The research states that this holds even after controlling for other factors such as the nature of the crisis, the policy response, and the degree of economic flexibility. The authors suggest that banking sector repair is very important to avoid slow recoveries, especially due to slow recovery in bank lending. That’s also why ECB is providing full liquidity to support the real economy.

IMF research (Vazquez and Federico, 2012) supports Basell III initiatives on structural liquditity and leverage. Evidence from the crisis shows that banks with weaker structural liquidity and higher leverage were more vulnerable to failures. This is of course self understandable but the curious thing is the systematic difference accross bank types. The smaller banks were more vulnerable to failures on liquidity problems while large cross-border banking groups typically failed on insufficient capital buffers. That‘s why Eurozone has placed more attention on bank recapitalization and capital cushions.

2.5 Fiscal imbalances and fundamental divergences

The crisis has exposed the fiscal imbalances between countries and also differences in macroeconomic fundamentals, raising doubts whether a monetary union can survive without converging into a fiscal one. As S&P stated after the downgrade of France&Austria: “Current crisis stems primarily from fiscal carelessness but the problems go much deeper because they come as consequences of rising external imbalances and divergences in competitiveness between the eurozone's core and the so-called "periphery".


The differences between the countries are well observable in the trading prices of their securities. If we look at 10 year bond, Germany is the the most expensive while Greece is the cheapest one.

Table 2.1 — 10 year government bond yields, as of 8 march 2012. Source Reuters.

Name Coupon Mat. Dat Bid Yield

Ask Yield

Bid Price

Ask price

DE10YT=TWEB DE 10YT 2,0% 01/04/22 1.804 1.800 101.744 101.780NL10YT=TWEB NL 10YT 3.25% 07/15/21 2.138 2.127 109.318 709.411FI10YT=TWEB FI 10YT 3.5% 04/15/21 2.232 2.202 110.325 110.585AT10YT=TWEB AT 10YT 3.65% 04/20/22 2.819 2.755 107.209 107.791FR10YT=TWEB FR 10YT 3.0% 04/25/22 2.880 2.850 101.036 101.297BE10YT=TWEB BE 10YT 4.25% 09/28/21 3.377 3.318 107.000 107.791IT10YT=TWEB IT 10YT 5.0% 03/01/22 4.745 4.702 102.443 102.780ES10YT=TWEB ES 10YT 5.85% 01/31/22 4.979 4.914 106.654 107.180SI10YT=RR 10Y T-BOND 4.375% 01/18/21 5.042 4.838 95.315 96.715IE10YT=TWEB IE 10YT 5.0% 10/18/20 6.992 6.620 87.408 89.595PT10YT=TWEB PT 10YT 3.85% 04/15/21 14.039 12.840 49.397 53.325GR10YT=TWEB GR 10YT 5.9% 10/22/22 36.559 29.477 19.000 25.000

2.6 Recession is here

Although it is commonly known that crisis have a negative effect on the output, BIS has specifically analyzed the effects of debt crisis on short and medium term. Furceri and Zdzienicka (2011), studied a panel of 154 countries from 1970 to 2008 concluding that debt crises are very detrimental, reducing output growth by about 6-10 percentage points. The paper also presents empirical evidence that exceeding a certain level of public debt affects output growth.

2.7 Hidden balance of payment crisis

Theoretically a current account deficit should be financed by a capital account sufficit, meaning that if a country is spending more than it earns, it has to borrow from abroad to finance the extra spending. In eurozone, peripheral countries are suffering increasing current account deficits, while core countries are having sufficits.

In the Target2 system8, ECB stands as a clearing house and trade cash-flows between companies, let’s say german and greek ones, are transferred between the commercial banks accounts. The respective central banks (Bundebank and Bank of Greece) just register Target 2 balances with the ECB, Buba records receivables while Bank of Greece a liability, no actual settlement occurs. As of 2012, Target2 balances

8 Trans-European Automated Real-time Gross Settlement Transfer System.

Nertila Xhelili 17

have become a source of alarm with Buba claims over 500 bln euro as end of 20119. Netherland, Finland and Luxembourg have positive balances too while other countries, especially PIIGS are running negative balances. That’s understandable, the system is saying that there was a capital flight to Germany and other AAA countries bcs they are perceived as safer. As there is no limit for balances in Target2, Greece has an open line of credit with the ECB, which is being automatically financed by a corresponding loan from Buba to the ECB. Previously there were no such problems with Target2 bcs greek liabilities for importing goods/services were being financed with money borrowed from international banks (not with money from bank of Greece) and the balances leveled out.

A BoP crisis has been avoided for the moment as ECB has stepped in and flooded the system in liquidity, but still rising balances at Target2 are an alert that risk is still present. Sinn&Wollmershaeuser (2011) conclude that they indeed measure Eurozone’s internal balance-of payments surpluses and deficits. Sinn (2011, pp 4) also finds that through 2008 to 2010, no less than 89% of the aggregate current account deficit of the four GIPS countries and 59% of Germany’s current account surplus (capital export) was Target credit. The BoP hidden crisis is the reason that bailout programs have heavily insisted on wage cuts, because increasing competitiveness is the key to tackle fundamental problems like current account deficits.

So far Buba and ECB have treated Target2 balances as statistical items, since they net out in eurozone and don’t appear on ECB balance sheet. According to the system rules, Germany’s risk doesn’t reside in Buba claims, but in the liabilities of the deficit countries bcs each of the countries will bear the losses in proportion to its share in the ECB (Sinn& Wollmershaeuser 2011). If one of the countries defaults, it doesn’t really matter who has accumulated claims or liabilities, all the countries will bear that loss, in proportion to the share in the ECB.

3 Response to the crisis and lingering doubtsProbably no one counted how many times did european leaders meet for summits

or the days with rumours about a possible greek default. A greek tragedy first and then a powerful debt crisis spreading to the core countries, demanded a strong and multidimensional response, that the following paragraphs attempt to summarize.

3.1 Monetary easing

ECB changed course of monetary policy in mid 2011, went from a hiking cycle to an easing one in a swift way. The base rate is now at 1%, an historical low and unconventional measures were adopted. After a long discussion ECB started buying peripheral debt and relaxed collateral rules to increase access to liquidity. The most

9 FT, <http://ftalphaville.ft.com/blog/2012/03/02/907611/>


important unconventional measure is the liquidity flood. On the verge of a credit cruch, ECB opened the tap offering two LTROs (long term refinancing operations) with a maturity of 3 years. As of end of february ECB, has provided nearly 1.1 trillon euro in open market operations. The primary purpose was to avoid a credit crunch, which has been achieved so far. The second aim is channeling the credit to the real economy, which according to Draghi has begun to happen but it’s still to been seen, as it lags in time.

There are not many options left for ECB (which has an inflation priority), too much liquidity in the system contains risks for the future. There is also the risk of a low interest rate trap, meaning that central banks may be forced to keep interest rates low for an extended period of time and keep providing liquidity, out of fear for the financial stability. The risk is that periods of low interest rates make high risk activities more attractive, increasing economic imbalances (Cao and Illing, 2011).

3.2 Austerity measures

Austerity measures most typically include reducing budgets, raising taxes, boosting competitiveness. But the usually quoted measure of a country’s ability to repay its debt, debt to GDP, has continued to rise even though these measures have been adopted. That’s not because the debt has increased but because the GDP is falling. Bini-Smaghi (2011) mentioned three ways to reduce debt burden;

■ Fiscal adjustment ■ Inflation ■ Restructuring/default

As monetary financing is prohibited and ECB has a mandate to keep inflation under control, the second alternative is not an option. Restructing and default was considered to be systemically dangerous for eurozone and that’s why Greece was given two packages and was guided towards a restructuring of the debt. But that cannot be done for other countries, if EU wants the rest of the world to trust it again. That’s why the only plausible way is fiscal adjustment. It is costly, needs time and there are doubts if it will pay off but the other option, default/ break down of eurozone is costly as well. No one can quite estimate economic and political costs but it is now clear that political leaders already decided that these costs are too high.

In the middle of a crisis, eurozone has to wrestle between austerity and growth. To quote the perfect comparison from NY Times “Without growth, reducing debt levels becomes nearly impossible. It is akin to trying to pay down a large credit card balance after taking a pay cut. You can slash expenses, but with lower earnings it is hard to set aside money to pay off debt”.10

The main point of the austerity measures is probably wage cutting that would

10 NY Tims, <http://www.nytimes.com/2012/02/15/business/global/portugals-debt-efforts-may-be-a-warning-for-greece.html?_r=1&pagewanted=1&ref=global-home>

Nertila Xhelili 19

promote an increase in competitiveness. It targets the german model, the strongest in eurozone with a careful approach to spending and strong exports, where wage levels have risen less than other countries, keeping it competitive in international markets.

3.3 Banks recapitalization

The sovereign crisis took a big toll on banks. Even countries with stable debt metrics are not fundamentally stable because of their banking sector exposures. Knowing that eurozone countries are mostly bank-based economies, it is easy to understand why stress tests and bank recapitalization plans were given so much importance. Banks were put under stress tests last year aiming to evaluate the resilience of the european banking sector against an adverse but plausible scenario, measuring the sensitivities to a general economic downturn and deterioration in the main variables such as interest rates, economic growth and unemployment (EBA, 2011). As EU president Herman Van Rompuy mentioned:

“Short term recapitalization is needed in the current exceptional circumstances to create a temporary buffer allowing the banking system to withstand shocks in a reliable manner.”11

3.4 Fiscal compact

European leaders agreed on a fiscal compact that was formally signed by 25 countries (Uk and Czech Republic didn’t sign) on 01-02 march summit. The aim of the compact is to promote fiscal stability, by addressing the big divergences between the countries and setting fiscal standards that will help prevent another crisis of this kind. Main points of the compact are (European Council 2011):

■ Budgets must be in balance or surplus, excluding business cycle variations, it cannot be higher than 0.5% of GDP. If not in balance, automatic correction rules, written into national laws (preferably the constitution), must kick in.

■ Countries that have debt to GDP ratio below 60% can have a bigger structural deficit, but not more than 1 % of GDP. Countries with public debt above 60%, have to reduce the excess by one twentieth a year

■ National debt issuance plans will be coordinated in advance ■ Only countries that have ratified the fiscal compact and written balanced

budget rule into national law will be eligible for eurozone bailouts from European Stability Mechanism.

Learning from this crisis, euorozone is now committed to stronger fiscal discipline.

11 Eurotribune, <http://www.eurotribune.eu/index.default.php/?p=21064?


It is still to be seen if it will succeed but in the mean time, this fiscal compact is a sign of the political will to go towards a strong fiscal union and also a committment keep euro alive.

3.5 Concluding remarks

During the last couple of years, between bailouts, summits, unprecedented ECB moves and the fiscal compact, Europe has shown the necessary commitment, to not only safeguard the monetary union but to make it stronger by aiming fiscal convergence. Considering all the work done so far to hold on even to the weakest links, the breakup of eurozone is a largely remote option.

The primary lesson from the sovereign crisis is that fiscal discipline is essential to move forward. The fiscal compact promotes prudent fiscal policies that proved to be essential if the EU wants to avoid a repetition of this crisis. Austerity vs. growth is a big dilemma, raising doubts whether reduction of debt levels can be achieved when in a recession, but in a crisis of these dimensions, long-term improvement has to come first.

To achieve economic convergence, attention should be placed on growth policies and competitiveness boosting measures, especially for peripheral countries the real challenge is tackling fundamental problems, like current account deficits. Labor market reforms and increasing competitiveness are key to recovery because these are the kind of measures that can achieve economic convergence and support eurozone in the long-run.

Bank recapitalization plans are systemically important and will play an important role in the recovery, as most the eurozone economies are bank-based. ECB measures have avoided a credit crunch so far but market market confidence remains volatile. The soundness of the banking sector and its resistance to shocks and contagion is necessary to avoid another type of crisis, that can be even harder than the actual one.

4 ReferencesAfxentiou, Panos, 2000, “Convergence, the Maastricht Criteria and their benefits” pp

249.

Allard, Julien and Rodolphe Blavy, 2011,”Market Phoenixes and Banking Ducks, Are Recoveries Faster in Market-Based Financial Systems?”, IMF Working Paper, WP 11/213, pp 24.

Avdjiev, Stefan, Andreas Schrimpf and Christian Upper, 2012, “Highlights of the BIS international statistics”, BIS Quarterly Review, December 2011, pp 15.

Bini Smaghi, Lorenzo, 2011, “Sovereign Risk and the Euro”, ECB, pp 6.

Nertila Xhelili 21

Cao, Jin and Gerhard Illing, 2011, "Interest rate trap" or: Why does the central bank keep the policy rate too low for too long time?”, Norges Bank working paper, pp 4

Collins, Neil, 2012, “Now that’s what I call a target”, Financial Times/Alphaville, <http://ftalphaville.ft.com/blog/2012/03/02/907611/>.

Comstock, 2012, “The greek rescue-an agreement that few believe’, Pragmatic Capitalism, retrieved from http://pragcap.com/the-greek-rescue-an-agreement-that-few-believe.

Davies, Michael and Tim Ng, 2011, “The rise of sovereign credit risk: implications for financial stability”, BIS Quarterly Review, September 2011, pp 62.

European Banking Authority, 2011, “EU-wide stress test aggregate report”, pp 2

“EU leaders agree on bank recapitalization plan”, 2011, Eurotribune, <http://www.eurotribune.eu/index.default.php/?p=21064?>

“Factors behind our rating actions on Eurozone Sovereign Governments”, 2012, S&P, <http://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245327305715>.

Furceri, Davide and Aleksandra Zdzienicka, 2011, ”How Costly Are Debt Crises?” IMF Working Paper, WP 11/280, pp 15.

Index Mundi, 2012, “Netherlands economy profile 2012”, <http://www.indexmundi.com/netherlands/economy_profile.html>.

Kiff, John, Sylwia Nowak and Liliana Schumacher, 2012, “Are rating agencies powerful? An investigation into the impact and accuracy of sovereign ratings”, IMF Working Paper, WP 12/23, pp 4.

Knight, Laurence, 2011, “What’s the matter with Italy?” BBC, <http://www.bbc.co.uk/news/business-15429057>.

Laine, Veli and Mart Maiväli, 2010, “Finland: adjusting to an ageing population”, Ecofin country focus, volume 7, issue 4, pp1.

“Q&A: Irish republic bail-out”, 2010, BBC, <http://www.bbc.co.uk/news/business-11766346>.

Ross-Thomas, Ema, 2012, “Spanish Unemployment Rises to 15-Year High of 22.9%: Economy”, Business week, <http://www.businessweek.com/news/2012-01-29/spanish-unemployment-rises-to-15-year-high-of-22-9-economy.html>.

Simpson, John, 2011, “Nowotny Dismisses Fears of Austria East Europe Exposure, FT Says”, Bloomberg, <http://www.bloomberg.com/news/2011-11-23/nowotny-dismisses-fears-of-austria-east-europe-exposure-ft-says.html>.


Sinn, Hans-Werner, 2011, “Bubbles, Current Account Deficits and Rescue Operations”, pp 4.

Sinn, Hans-Werner and Timo Wollmershaeuser, 2011, “Target loans, current account balances and capital flows: The ECB’s rescue facility”, NBER Working Paper Series, Working paper 17626, pp 5, 30.

“S&P warns Finland and other euro states of possible downgrade,” 2011, Uutiset, <http://yle.fi/uutiset/news/2011/12/sampp_warns_finland_and_other_euro_states_of_possible_downgrade_3083180.html>.

Stratfor, 2012, “Austrian Banks to Limit Exposure to Central, Eastern Europe”, <http://www.stratfor.com/analysis/austrian-banks-limit-exposure-central-eastern-europe>.

“The fiscal compact ready to be signed”, 2012, European council, <http://www.european-council.europa.eu/home-page/highlights/the-fiscal-compact-ready-to-be-signed-%282%29?lang=en>.

Thomas Jr, Landon, 2012, “Portugal’s Debt Efforts May Be Warning for Greece”, NY Times,<http://www.nytimes.com/2012/02/15/business/global/portugals-debt-efforts-may-be-a-warning-for-greece.html?_r=1&pagewanted=1&ref=global-home>.

Vazquez, Francisco and Pablo Federico, 2012, “Bank Funding Structures and Risk: Evidence from the Global Financial Crisis”, IMF Working Paper, WP 12/29, pp 17-18.

RISK

OBJECTIVE

MA

NA

GE

Determinants of growth in times of crisis: empirical evidence from Albania

Persida Spirollari

Alpha Bank Albania, Tirana, Albania

AbstractThe aim of this study is to examine the main factors that influence the economic

growth of Albania. Taking GDP as a proxy of economic growth, we analyze the main determinants of this indicator for the period of early crisis to the post crisis. The data are given a time series interpretation with annual frequency, starting observation year 1991 and ending observation 2010. We use log of GDP as a dependent variable and remittances, foreign direct investments, trade openness and inflation as explanatory variables. Furthermore, we include two dummy variables in the regression: Crisisi,t-1 and Nocrisisi,t-1 in order to examine whether remittances matter more during the last global financial crisis.

By running the OLS regression, the results show that trade openness, price stability and remittances influence significantly GDP. Moreover the effect of remittances in GDP is found to be higher in times of crisis.

Keywords: GDP, crisis, remittances


1 IntroductionThe last financial crisis has negatively affected the economic development in

many countries worldwide. Despite the challenging regional environment, the Albanian economy has experienced positive growth but at a slow pace. Albania has been affected by the crisis mainly as a consequence of decreased remittances, trade and higher risk premiums. From this point of view, it is of special interest to explore the main determinants of Albania’s growth for the last 20 years which includes also the period of crisis. In this study, our purpose is to find the significance of different variables on the GDP of Albania and also examine whether any variable has greater importance during the crisis.

The paper is going to be structured in the following way: introduction is presented at the beginning. The second part provides a short overview of Albania’s economic environment for the last years. The third part introduces the hypothesis to be tested, while the forth part is about the data description. The fifth part reports the regression analysis. The last part summarizes the main conclusions of the paper.

2 Albania’s economic environmentAlbania’s economy overcame the negative impacts of the recent financial crisis

rather well. It enjoyed a high annual growth rate over the last 10 years and a low inflation rate. Beside the slowdown experienced in the end of 2009 and beginning of 2010 due to the decrease in the volume of exports and domestic demand, the Albania’s economy jumped again to positive growth rates. This recovery was achieved as a result of the increase in Albanian exports. The macroeconomic indicators such as exports and foreign demand have substantially recovered during the year 2000.

The below graph presents an overview on the way GDP growth rate has evolved from year 1999 to 2010. It can be observed that has remained quite stable during the year 2007 and 2008 but has decreased significantly in the beginning of year 2008 up to the beginning of 2009. This recession is attributed mainly to the negative impacts of the crisis related mainly with the decrease in trade, FDI and remittances. However, the GDP growth has recovered in the beginning of 2009. In the first quarter of 2009, the real growth rate was 3.5 %.

Persida Spirollari 25

12

10

8

6

4

21999 2000 2001 2002 2003

Albania

2004 2005Year

2006 2007 2008 2009 2010

Figure 3.1 — GDP real growth rate. Source: Indexmundi.com

3 HypothesesTaking into account the recent economic developments in Albania and based on

our economic intuition we propose the following relationships between indicators that we would like to test through this paper:

1. There is a negative correlation between inflation and GDP.

2. Remittances matter more during financial crisis.

4 Data descriptionThe data used in this study is obtained from the World Development Indicators

(WDI) & Global Development Finance. The analysis is focused on the key factors that determine the economic growth of Albania for the period from 1991 to 2010. Our dependent variable is gross domestic product (GDP) which is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. The independent variables included in the model are:

1. Foreign Direct Investment (FDI) refers to the net inflows (from balance of payments), and includes equity capital, reinvested earnings, and other capital associated with inter-company transactions between affiliated enterprises but excludes capital flows for exceptional financing, (e.g., debt-for-equity swaps).

2. Openness to trade is captured by the sum of exports and imports of goods and services. Exports represent the value of all goods and other market


services provided to the rest of the world and imports refer to the value of all goods and other market services received from the rest of the world. This is a standard proxy widely used in previous literature.

3. Inflation is measured by the annual growth rate of the GDP implicit deflator and shows the rate of price change in the economy as a whole. Price stability is used as an indicator of a stable macroeconomic environment.

4. Remittances are classified as current private transfers from migrant workers resident in the host country for more than a year, irrespective of their immigration status, to recipients in their country of origin.

Additionally, we include in the regression two dummy variables: Crisis and Nocrisis in order to determine whether the factors that influence economic growth become more important during the financial crisis. The underlying hypothesis is that some components of GDP decrease during the crisis and might influence significantly the economic growth of a country. The crisis dummy variable takes value one in the years 2005, 2006, 2007, 2008, 2009, 2010 and zero otherwise. To the contrary, the no crisis dummy variable takes the value of zero in the years 2005, 2006, 2007, 2008, 2009, 2010 and one otherwise. According to this, any variable taken in the study can be decomposed into two parts: For example Remittances can be expressed as the sum of Crisis* Remittances and Nocrisis* Remittances (since Crisis + Nocrisis = 1). In this aspect, we will test on the equality of the parameters in order to determine whether the effect of any variable is greater during crisis.

5 Regression analysisIn this study we will estimate what influences the economic growth of Albania.

We will consider four important explanatory variables (FDI, trade openness, inflation and remittances) that are considered to explain the GDP, used as a proxy of the economic growth. Since the period that is being analyzed covers the global financial crisis period, it is of special interest to examine whether the influence of any the explanatory variable has intensified during the crisis. According to this, the variable of remittances is decomposed in two parts, one referring to remittances before the crisis and the other referring to remittances after the crisis period.

To assess this empirically we specify the following regression equation using log form for some of the variables:

l_GDPB = β0 + β1* Inflation+ β2* l_FDI + β3 (Crisis*Remittances) + β4*(Nocrisis*Remittances)+ β5 * l_Trade +☐

■ l_GDP – Dependent Variable ■ β0 – Value of GDP when all variables are 0 meaning the country has no

FDI, no trade, no remittances and also the inflation is zero. ■ β1 - Parameter of inflation


■ β2 - Parameter of foreign direct investments ■ β3 - Parameter of remittances during crisis ■ β4 - Parameter of remittances during non-crisis period ■ β5 - Parameter of trade openness

Table 3.1 — Model 1: OLS, using observations 1991-2010 (T = 20). Dependent variable: l_GDP.

Coefficient Std. Error t-ratio p-valueconst 11.4571 1.98108 5.7833 0.00005 ***Inflation -0.0027151 0.000681194 -3.9858 0.00135 ***l_FDI -0.0890657 0.0856768 -1.0396 0.31617Crisis*Remittances 0.474019 0.110839 4.2766 0.00077 ***Nocrisis*Remittances 0.465832 0.110211 4.2267 0.00085 ***l_Trade 0.0229729 0.00640476 3.5868 0.00298 ***

Mean dependent var 22.11655 S.D. dependent var 0.852351Sum squared resid 0.210326 S.E. of regression 0.122570R-squared 0.984763 Adjusted R-squared 0.979321

*** Significant with 99% confidence level

** Significant with 95% confidence level

* Significant with 90% confidence level

Using observations from 1991 to 2010, we obtain the following regression line by Ordinary Least Squares (OLS ) method:

l_GDP=11.4571-0.0027151*Inflation-0.0890657*l_FDI+ 0.474019*(Crisis*Remittances) +0.465832 * (Nocrisis*Remittances)+0.0229729*

l_Trade +☐

According to the above results, it can be pointed out that inflation, remittances and trade influence more significantly the GDP of Albania. This is expressed by their respective p values leading to the conclusion that parameters β1, β3, β4 and β5 are different from zero with more than 99% confidence. Additionally, the constant appears to have the same significance. On the other hand, the FDI coefficient is not a significant determinant of GDP. The economic interpretation of the inverse relationship between FDI and GDP is that despite the decrease in FDI inflows, Albania’s GDP continued to increase due to the influence of other factors such as trade, inflation etc. It can be observed that the inflation is inversely related with GDP. This can be explained with the fact that the lower levels of this variable imply commitment and credibility of the government and better climate for investment and economic growth. This finding proves right hypothesis 1 that inflation and GDP are negatively related.


Trade in Albania appears to foster GDP growth. The positive relation between trade and GDP implies that the more Albania’s economy is linked to the rest of the world through a liberalized trade, the higher will be its economic growth. An increase of trade by 1% increases GDP by 0.02%.

Coming now to the effect of remittances on GDP, the results show that the estimated parameter is greater during the crisis period (0.47 compared to 0.46). In order to determine whether the coefficients are significantly different from each other we run the test on the equality of parameters. The test rejects the null hypothesis that the parameters are equal (β3 = β4). This implies that the influence of remittances is higher during the crisis. This suggests that not only remittances increase the GDP of Albania, but their effect is even more important during the recent financial crisis, reflecting consistency with hypothesis 2.

The adjusted R-squared is very high, implying that about 98.5% of the variation in Albania’s GDP is explained by the above model.

6 ConclusionThe aim of this study is to examine the main factors that influence the economic

growth of Albania. The last financial crisis has negatively affected the economic development in many countries worldwide. Despite the challenging regional environment, the Albanian economy has experienced positive growth but at a slow pace. In this context, the paper analyses the main determinants of GDP for the period of early crisis to the post crisis, using GDP as a dependent variable and foreign direct investments, trade openness, inflation and remittances during the crisis and no crisis period as explanatory variables. The findings show that Albania’s economic growth is highly influenced by inflation, trade and remittances. Analysing the obtained results, we cannot reject Hypothesis 1 which stipulates that inflation is negatively related with Albania’s GDP. The second hypothesis is proved right as the empirical model showed that remittances increase the GDP of Albania and they mattered more during the recent financial crisis.

7 ReferencesBaltagi, B.H.(2002):”Econometrics” 3rd Edition.

Banka e Shqiperisë (2010): “Raporti vjetor”.

Banka e Shqiperisë ( 2011): “Politika të stabilitetit monetar dhe financiar – leksione nga kriza”.

Fullani, A. ( 2011) : “Politikat ekonomike në EJL: Hartimi, ecuria dhe sfidat”.

Kota, V. (2011): “Persistenca e inflacionit në Shqipëri”.


World Bank ( 2011): “Albania partnership program snapshot”.

Internet source: http://databank.worldbank.org/ddp/home.do.

Internet source: http://www.indexmundi.com/albania/gdp_real_growth_rate.html.

RISK

OBJECTIVE

MA

NA

GE

Total national debt and economic growth

Gerdi Lito

MSc in Finance, Phd Candidate,Lecturer/Researcher, University of Tirana, Faculty of Economics, Department of Finance

@: [email protected]

AbstractThe debt crisis in Europe has raised several questions about the future of

Euro. However public debt is not the only one. Total national debt includes debt of households, businesses and financial institutions. How much debt can an economy afford? Is there any optimum level of debt within an economy? Do we have to change our way of living because of debt? And how is debt connected to economic growth? This paper will try to give some answers to these questions.

The paper is based on data collected for several developed and developing countries. A analysis is performed to see the connection between total national debt and economic growth level.

Key words: debt, economic growth, financial institutions, GDP, financial sector

mailto:[email protected]


1 What is total national debtThe European economy has actually sunk in a crisis that has the origin in the

problems of some of the members of the European Union have with their budget deficits and debt. This has been often called a debt crisis, often meant as the public debt crisis. There is a large debate on how to manage public debt, which may in the future bring to new paradigms, theories and also new institutions in the public finance world.

But it is very unlikely that debt in an economy should be an issue only for the government and the public sector. Everyone from the major actors in the economy is somehow and somewhat indebted. Families use debt to improve their lives and businesses use debt for investment or working capital. The financial sector which serves as an intermediary also uses leverage to make profits. So debt is part of our everyday life and has been so for many centuries. And even when it becomes a problem, it is often a problem for all the actors of an economy, not simply for one of them. We are in the middle of a debt crisis but is it just a problem of bad public management or is it a problem of our way of living, which has gone beyond possibilities? The issue risen in this paper concerns mostly with what is called total national debt.

If you search for national debt in the literature you will often find papers concerned with just what we know as public or sovereign debt. Total national debt in fact is much more. It also includes debt of households, private sector and the debt of the financial sector. Each of these kinds of debt shows something about the way the economic actors are “playing”. A high level of debt from households means they are increasing actual consumption and probably forecast better times and revenues in the future. High debt from business usually is accompanied with higher level of private investments. In cases when public debt raises in higher levels, this maybe a sign of an expansive fiscal policy but also a sign of a bad fiscal management. Things differ with the financial sector, whose debt depends on its development, dominance and competition, and also from the general structure and size of the economy.

The first component of the total national debt is household debt. It includes all the debt of the families, mostly to financial institutions but also private debt. It is not that easy to be measured as debt for families may come in different forms such as loans, overdrafts, credit cards, due bills, etc. Household debt can be long term such as mortgage loans, but is mostly short-term. Household debt is bigger in developed countries, where wage revenues are also higher. In developing countries, where the level of GDP/capita is low it is often difficult for individuals to get loans, so this figure is quite lower. Normally a figure showing the total of loans accorded to individuals by lending institutions (including mortgages, consumer loans, credit card dues, etc) can be often used as a proxy for household debt. A large household debt can be a major problem as it means families are so much indebted that they can’t afford more debt and have to lower consumption. Also it is a sign of future problem of the lending institutions regarding loans default.

Gerdi Lito 33

Another important component is private debt, or the debt of the business. It takes many forms, practically every possible form of debt from securitized debt (bonds), loans from lending institutions, short-term debt, account payables (often called trade debt), and also private lending agreements. Most of the debt of businesses is long-term, as it is often used for investments and expansion. Usually when the long-term part debt of the businesses is growing it shows growth of investments and is accompanied by the falling of the unemployment rate. It is the growing of the short-term debt that is often a big issue as it may show a lack of liquidity in the economy. It may lead to a chain of debt in real economy, where businesses owe large amounts of money to each other in the form of accounts payable. The case of the construction sector in Albania is actually such a problem. In developed countries the level of private debt is also higher than that in developing countries, mostly because of better access in financial markets and in the funds from the banking sector. The total of the bonds issued by corporations and the loans accorded to businesses from lending institutions is often used as a proxy for private debt. This leaves out debt that comes from everyday operations like account payables, however, as we mentioned above, it is the long term debt that counts for the major part of private debt.

Public debt is the third component and probably the most problematic one. If families borrow to improve their living and businesses borrow to boost earnings and profits, the government often borrows because it can’t afford expenses to fulfill its duties and obligations. Public debt as known can be long term or short term, domestic or foreign (household debt is always domestic and business debt is mostly domestic). It can be exactly measured and is mainly composed from securities (T-bills and bonds), loans from financial institutions or other countries and in smaller quantities by account payables. Government figures of public debt are regularly and periodically published in most countries. As we said, public debt growth may not always be a bad sign, although often public debt growth is connected to bad fiscal management. It may be also a part of an expansive fiscal policy, trying to boost the economy. Developing countries count for more public debt as developed countries. This debt can often suffocate a developing economy, especially if it is not used for investments, but just for momentum expenses.

The last component of total national debt is that of the financial sector. It depends from the size and structure of the financial system of a country. It is pretty normal for financial institutions such as banks, to have debt as their major financing source. But often debt is used not to finance normal or traditional operations, but also speculation and derivative trading strategies, which may result in huge losses. Most of the debt of financial institutions is long term, and mainly domestic. Large multinational actors also have big quantities of foreign debt. Usually a strong financial sector has larger size and also larger debt, and this is characteristic of developed economies. In small developing countries the size of the debt of the financial sector is much smaller and less diversified.


2 Literature review on debt and economic growthMany authors have dealt with the problem of debt impeding economic growth.

It is logical that a big amount of debt brings bankruptcy for every economic actor (household, business, government). But which is the level that should not be trespassed to avoid slowing down economic growth?

Regarding public debt there is a general consensus that the level of debt/GDP over 90% leads to fall of economic growth. Reinhart & Rogoff (2010) find that below the threshold of 90% the relation of public debt to economic growth is weak. If the threshold is passed, median growth falls about 1% and average growth rate falls more. Another important consideration of these authors is the fact that the threshold is considerably lower for emerging markets debt denominated in foreign currency, at about 60% of GDP. Presbitero (2011) has studied the effect of all public debt (domestic and foreign) in developing countries and gave almost the same threshold level, at about 90% of GDP as a limit for debt to impact negatively on economic growth. An important issue regards the capacity and ability of the country to manage debt, developing countries with better debt management can reach higher levels of public debt without negatively impacting GDP growth. Cechetti, Mohanty & Zampolli (2011) pose the question for all types of debt, except for that of the financial sector. They studied the data only for OECD countries and found similar results for the all kind of debts at about 85-90% level of GDP. According to their study a government debt of above 85% of GDP impacts negatively economic growth. They find the same threshold for household debt, although they do not claim precision estimate. For private corporate debt the threshold found is at 90% of GDP. As we may see, in general studies show that public and private debt, except for the financial sector, should not pass the limit of 90% of debt/GDP if we don’t want to have negative effects on growth.

There are no clear results about the level of debt of the financial sector. As we mentioned above, the financial sector level of leverage depends mostly from the size, organization and country characteristics. Major economies, which have large financial institutions that are often multinational and serve as large financial centers, do often present very high levels of debt in the financial sector, but they have often performed well. While small developing countries may have low levels of debt of the financial sector and still have bad economic performance. However there is some discussion regarding the use of leverage from financial institutions to boost earnings through speculative strategies and involvement in derivative trading. Most of the losses in recent financial scandals have come in this way.

3 Debt trends in major economies – the process of deleverage has started

A study made by McKinsley (January 2012) show the situation of the debt in

Gerdi Lito 35

some major world economies and also in the European countries that are actually in economic and financial crisis (the also called PIIGS – Portugal, Italy, Ireland, Greece, Spain). It is scaring to see figures like 500% ratio of debt to GDP for countries like Japan or UK, however this is mostly due to large debt of the financial institutions, with London and Tokyo being the biggest financial center in Europe and Asia. With few exceptions the levels of individual components of national debt rarely pass 90% (see for example US economy) and the composition of total national debt can tell us many things about the structure of the economy and the possible sources of the economic and financial crisis in different countries.

It is interesting to see the composition of debt in the European countries that are part of the crisis. Greece and Italy present high levels of public debt and their crisis is mostly a public finance one. The situation of Spain and Portugal is different. Their public debt is moderate, but they have a very high level of private corporation debt. This is due to the expansion of credit during the global credit boom in last decade. Spain saw interest rates fall when entered in Euro and this gave start to a new credit expansion and a “bubble” in the real estate market. Same thing has happened also in Portugal. The situation is very difficult in Ireland, which has problems also with the debt of households and financial sector.

Recent data show that a process of deleveraging has started in major world economies. This is a normal reaction in time of crisis. Household lower consumption and the first things to be “cut off ” from the family budget are those that are bought by credit. The real estate market has worsened in many countries as the real estate bubble exploded. Before the start of the crisis many of the economies were characterized from high growth in private debt (household and business) and relatively very low growth of public debt. This was more due to the quick expansion of the real estate market


(especially the housing market). When recession started, many major economies gave the first signs of deleverage in private debt. Companies and household stop borrowing. Public debt start to grow as the government tries to boost economic growth through public expenses or tax cut-offs. The other stage of the process is the most problematic, private sector deleverages while public debt grows heavily. This may be the case of some European economies, such as Spain or Italy. The main problem in this stage is not to go far with public debt so it can impede further growth. But also the governments try to intervene through fiscal policy by raising public expenses or cutting off taxes. If they do not intervene at all this may lead to a very long recession spiral. Intervention of monetary authorities may be distorted by the fact that high levels of private debt deter the expansion of new credit even if interest rates are lowered sensibly. The final stage of this process is where the economy gives signs of recession ending and starts expansion. Private sector starts to have high debt growth, public sector deleverages. Although for many European economies this stage seems far away and austerity time has come, this is a process that has happened before during times of credit crisis and will happen again. Political intervention is of crucial importance to avoid defaults and to help private sector recover quickly. Governments should try to focus not only in fiscal reforms, but also to try to improve private investments through various incentives and to stabilize the banking system and the real estate market.

4 What has happened in Albania

GDP growth

Economic growth in Albania has been stable for many years. After 2008 there has been a significant fall of the economic growth, mainly due to the effects imported from the crisis in neighbor countries, especially Greece.

Total debt to GDP

This figure has grown constantly through years, especially from 2004 and afterwards. This is because of the fast expansion of the banking sector in the last years.

Gerdi Lito 37

Actually total debt to GDP is at about 177%

In order to calculate total debt we have taken into consideration the public debt, the loans for individuals as a proxy for household debt, loans for businesses as a proxy for private business debt and the total of liabilities of the banking system as a proxy for the debt of the financial system. These proxies are good estimations of real debt as there is no debt securities issued in Albania by the private sector such as bonds, notes, or other type of debt, and also the banking sector is the absolute dominator of the financial system.

Public debt to GDP

The ratio of the public debt to GDP has been stable to the 60% level. Governments in Albania have been careful not to go far beyond with the debt. The good thing is that the debt is mostly domestic, although there is a tendency for a growth of the foreign debt share in the last years. Also there is a tendency to issue debt denominated in Euro. The problem with these figures reported by the government is that they do not include the unpaid bills of the Government, a figure that has grown up recently.

Household debt to GDP

This ration has presented an exponential growth during years from 2001 to 2008.


This period has been a period of expansion of credit. Still total debt of households to GDP remains small not passing 12%. The interesting phenomenon that has been noticed in the last 2-3 years is that probably deleverage started in the household finances. Credit for individuals and families has grown little and also data from the Bank of Albania show a lower consumption in the last months. This is a sign that a process of reduction of debt because of bad expectances for the future has started.

Private sector (non-financial) debt

From 2.5% of GDP to almost 27% of GDP in a decade, this is probably the debt component which has figured the biggest growth. After 2004, we can see a strong constant growth that matches with the expansion of the credit from the banking system. Although the rhythm of growth has decreased in the last years, the ratio continues to grow, a sign that there is still demand for credit and investments in the private sector.

Financial sector debt to GDP

Similarly to the other two components the debt of the financial sector has grown up in the last decade. Growth has been fast during the period

Gerdi Lito 39

2003-2007 and has slowed down later, with a negative growth in 2008. However in the last two years there has been again a growth of the liabili-ties of the financial system passing the threshold of 80% of GDP.

5 Data analysis and conclusionsFrom the data we presented in the section above we can perform an analysis

and draw some conclusions. First, correlation between economic growth and total debt (as well as to any of its components) is not statistically significant. This is comfortable with the existing literature because of the actual debt levels far below from the “limit” thresholds in Albania. Second, as we said debt in Albania is still far from empirical possible thresholds, but we need to take in consideration “unofficial” debt. This includes business debt that is not taken from the banking system, and also the “debt chain” of account payables in various sectors of the economy, especially in the construction sector. Also as we mentioned there is a growing figure of unpaid bills from the public sector (central and local) for services that have already been delivered. Third, credit expansion certainly is slowing down, but shall we expect deleverage in the private debt (business)? In the last years private sector debt has grown but the effects of the debt chain or lack of liquidity may impede new investments and growing of credit for the economy. Fourth, the financial sector in Albania has passed the stage of quick growth and is going towards maturity, especially the banking system. This means we expect to have constant levels of debt to GDP ratio for this sector in the years to come. Albania has not an active financial market, so there is little chance that financial institutions will issue debt or use leverage to earn profit from strategies involving trading of securities.

6 ReferencesBank of Albania, Annual Report 2011, Statistical Report January-March 2012.

Chechetti S. Mohanty M. Zampolli F.; 2011, The real effects of debt.

Mc Kinsey Global Institute; 2012, Debt and deleveraging; uneven progress on the path to growth.

Ministry of Finance of Albania, Data figures on Budget and the Fiscal Statistics.

Presbitero A.; 2011, Total public debt and growth in developing countries, working paper.

Shabbir S.; 2010; Does External Debt affect Economic Growth, working paper.

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The economic crisis: Greece and Albania

Rovena Bahiti,* Erjon Zoto**

Lecturer & Researcher, Department of Mathematics, Statistics and Applied Informatics, Faculty of Economy, Tirana University

*Prof. Asoc. Dr. @: [email protected]** Msc. @: [email protected]

AbstractThis paper presents and critically discusses the origins and causes of the Greek

financial crisis and its implications for the euro currency as well as the Albania economy. In the aftermath of the 2007-2009 financial crisis the enormous increase in sovereign debt has emerged as an important negative outcome, since public debt was dramatically increased in an effort by the US and the European governments to reduce the accumulated growth of private debt in the years preceding the recent financial turmoil. Although Greece is the country member of the eurozone that has been in the middle of this ongoing debt crisis, since November 2009 when it was made clear that its budget deficit and mainly its public debt were not sustainable, Greece’s fiscal crisis is not directly linked to the 2007 US subprime mortgage loan market crisis. As a result of this negative downturn the Greek government happily accepted a rescue plan of 110 billion euros designed and financed by the European Union and the IMF. A lengthy austerity programme and a fiscal consolidation plan have been put forward and are to be implemented in the next three years.

As for the Albanian economy, being connected to the Greek economy hasn’t put it seriously in danger yet, but there do exist several signs of a future crisis.


Key words: Sovereign risk, Debt crisis, Bonds market, Expectations, Remittances, Euro zone

1 IntroductionIn December 2008, the NBER1 stated that the US economy, the world’s largest

economy, had been in recession since December 2007, exactly a year ago.

By definition, an economy is said to be in a recession, if there is negative economic growth for at least two consecutive fiscal quarters. Anyway, there are also some different thoughts of defining an economic recession period.

In this chapter you will find some detailed information about the causes that produced this economic downturn, his domino effect on the global economy and especially the Euro zone. Lastly, you will learn more about the impact that the global economic crisis has had already over the Albanian economy and its way towards integrating in the European economic zone.

As mentioned above, the US economy has officially entered in a recession period since December 2007, but only now there were enough data to prove that. That’s primarily because an economic recession was already being suggested by some important economic indicators.

High commodity prices

During the last decade, we’ve experienced a boom in the commodities sector, which brought their prices up and up even more. One important product of the category is certainly oil, crude oil. So, only during 2008, we’ve all seen how the oil prices got high, so high that they caused real economic damage.

In January 2008, a barrel would be sold for as much as $100 a piece, which was a price level never seen for a long time. It would be soon surpassed by other price levels, reaching their highest peak during July 2008, as high as $147 a barrel. Soon after this time, oil prices and commodity prices generally began to fall.

The high oil prices led automatically to a chain reaction, which brought high food prices2 and the aggregate price level to a higher level. This simply means global inflation.

Inflation

By the beginning of 2008, there were data showing that the global inflation was at its historic levels, reaching the highest peaks of the last decades in many of the countries worldwide. We’ve already mentioned that commodities is one reason for that, while others may be the excess money supply around the globe and the rising

1 National Bureau of Economic Research.2 This may be seen in two different angles: the first refers to the strong dependence of the food

production on oil, the second is related to the usage of different food products as alternative energy sources to petroleum.

Rovena Bahiti,* Erjon Zoto** 43

demand for food in the fast growing markets.

Therefore, inflation was highest in the oil-exporting countries, but it was also growing in the no-exporting ones, especially the developing countries, cause of the rise in food prices3. Inflation was also increasing in the developed countries, but lower than the ones mentioned earlier.

Unemployment

At this point we’ll have to deal with a so called vicious circle. The economic crisis at the beginning was inducted by the increase in unemployment, which led to a lower demand for goods, which led again to more people losing their everyday jobs. So, according to ILO4, at least 20 million jobs will have been lost by the end of 2009 due to the crisis, where the biggest “contribution” is shared between the construction, real estate, financial services and, of course, the automobile sector. This fact will bring the world unemployment level above 200 million people for the first time in history, probably the worst news for everyone.

Credit crisis

This is a consequence of different factors, one of whom is the ability to create new lines of credit. This factor draws lots of cash flows from individuals and lowered dramatically the ability to sell or buy assets. The latter was a big punch for the financial institutions in general, which began to use their reserve cash, restricting the credit and ability to make new loans.

These facts led to the harsh bankruptcy process for many large, well-established investment banks, and also many other commercial banks in different countries around the globe. You will see some frightening cases later in this chapter.

Another factor to be mentioned would be the so called cheap credit. People could now buy a house in the easiest way possible and this led to notable speculation. More money was around, but it was to be spent on the same thing. That brought increased demand, and therefore inflation again.

These were the main factors that were suggested to be the causes of the economic recession in the economic system worldwide. As you could already have seen, they were strongly interrelated with each other. After all, it’s just economy. It is all related to one another.

2 The Greek financial crisis – the history behind itFrom one of the fastest growing economies in the Euro zone in the beginning

of the millennium, Greece fell from grace as the country dragging the Euro zone economy down. The Greek debt crisis dates back to its entry into the EU.

3 IMF.4 International Labor Organization.


November 2004. Greece admits that its government lied about its deficit in order to get into the EU.

The EU requires its member nations to have deficits below 3 percent - but Greece’s deficit was always above 3 percent, since 1999.

March 2005. Greece suffers from the huge costs incurred as the host of the 2004 Olympics. The new government plans to impose an austerity budget to cut the country’s deficit. 2006. Greece’s GDP is up 4.1 percent. The measures seemed to have worked.

November 2009. The Greek economy suffers from the 2008 global financial crisis. National debt rose to 262 billion euro from 168 billion euro in 2004 - the 2009 budget deficit reached 12.7 percent of GDP, more than twice the previously published figure.

December 2009. Fitch cuts Greek debt rating from A- to BBB+, the first time in a decade the country is rated below investment grade. PM George Papandreou announced tough rules to cut down government spending.

January 2010. The Greek government announces a second round of tough austerity measures; which include lowering government wages, fuel increases, and a crackdown on tax evasion. These measures prompted a series of strikes and protest that continue for months.

May 2010. The Greek government receives a US$145 billion (110 billion euro) rescue package from the Euro zone members and IMF. This follows another round of more stringent austerity measures implemented by PM Papandreou. This move also results in a 48 hour strike.

July 2010. Greek parliament passes the pension reform; a key requirement of the EU/IMF rescue package deal. This move limits early retirement, and forced millions to re-enter the workforce. The retirement age for women is also increased from 60 to 65.

January 2011. Greece receives ‘junk’ status from all three rating agencies, Fitch, S&P and Moody’s.

May 2011. Finance Minister George Papaconstantinou rules out debt restructuring, but hopes that EU and IMF will extend bailout loan repayments. The Greece government urges for budget cuts and privatizations to overcome its debt crisis.

June 2011. Greece begins talks with international creditors for a possible second bailout package, which is roughly equal to its first rescue package, to prevent country from default. PM Papandreou also proposes new and stricter austerity laws which prompts tens of thousands of people to protest against the new measures.

2.1 The main causes of the Greek financial crisis

A number of factors have contributed to the financial crisis that Greece has been experiencing since October 2009. Some of these factors are endogenous, having to


do with the structure of the Greek economy itself, the prolonged macroeconomic imbalances that the Greek economy faces and the credibility problem of macroeconomic policy. Other factors are exogenous and have to do with the implications of the recent financial turmoil and the timing of the response of Europe to the Greek fiscal crisis. We will briefly review all these factors in the following sections.

2.2 Endogenous causes of the Greek financial crisis

There is no doubt that running widening public deficits in conjunction with declining external competitiveness played a decisive role on the deteriorating fiscal stance of the Greek economy. Increased public expenditure in recent years led to dramatic increase in borrowing requirements and high levels of accumulated public debt. The debt-to-GDP ratio will continue to increase in coming years because of the € 110 billion EU rescue package, most likely getting above 150 percent by 2020.

The lack of the necessary fiscal consolidation during the past ten years, when Greece was experiencing high growth rates, in relation to the continuous false reporting of fiscal data5, have undermined the Greece’s government credibility. On top of that, the decline in competitiveness since EMU entry (Malliaropoulos, 2010) led to a persistent deficit in the current account. Increased “twin deficits” together with the lack of structural reforms in home forced Greece to issue new bonds at short maturity periods and at higher interest rates compared to the “anchor” of the EMU, Germany.

2.3 Exogenous causes of the Greek financial crisis

The Euro zone governments failed to give a clear signal indicating their readiness to support Greece, while the Greek crisis was deepening. Legal skepticism and questions like “are bailouts illegal?” were raised, mostly by Germany, for an issue which was partly political. However, there is nothing in the Maastricht Treaty that prevents a Member State or all EU Member States from helping a country in financial difficulty, individually or with the support of an outside body (IMF, EBRD, EIB, World Bank etc.). While Euro zone policy makers were debating whether bailouts are illegal, at the same time there were some ambiguities about ECB’s collateral eligibility criteria that is the ECB’s policy to accept or refuse the downgraded Greek government bonds as collateral in liquidity provision presented. These ambiguities created problems for financial institutions holding Greek government bonds.

Another exogenous factor that contributed to the instability of the Greek economy was the lack of solidarity funds at an EU level. EU is a monetary union not an economic one with a Federal Budget. EU has a common monetary policy set at a

5 In mid-October 2009, the newly elected government announced the budget deficit for 2009 was estimated to be 12.7 percent of GDP while the previous government was arguing in September 2009 that deficit would not be higher than 6.5 percent of GDP..


supranational level but economic policy is still in the hands of national policy makers. Whenever a crisis occurs at the EU periphery, there is no adjustment mechanism in place to deal with such a crisis at a supranational level. The lack of European solidarity was inevitably mirrored in widening Greek spreads to German Bund. Eventually, the EU leaders agreed on 25 March 2010 an €110 billion 3-year rescue package for Greece.

On the other hand, Greece and its major trading partners in the Balkans were also hit by the 2007 global crisis, but with a time lag (Vlamis and Karousos, 2010). Nevertheless, recession may have hit Greece somewhat less badly than other countries because a relatively small manufacturing sector and of the large share of the shadow economy.

3 Economic crisis in AlbaniaForeign investments and remittances are the only two elements that can bring the

global economic crisis closer to the Albanian economic reality. According to several experts, it has been generally admitted that our country and its fragile economy isn’t totally immune from the regional developments.

3.1 Current situation

The situation for the first quarter of 2012 follows the same trends of the end of 2011, where the real budget revenues continued to decline, along with private consumption and investments. Investments dropped by nearly 52 percent, while public expenditure dropped by 3 percent.

The overall situation shows the continuous deterioration of nominal budget revenues, which in the last period show stagnant or even declining values, therefore bringing a slower economy for the near future.

3.2 The possible impact over the Albanian economy

As we stated earlier, the two main factors that can bring economical consequences in Albania due to the global economic crisis are the FDI6 and the remittances. But these two factors are able to produce a chain reaction and expand the crisis’ impact over the Albanian economy.

According to that, some of the possible ways the global crisis can affect our economy are:

■ The reduction of the immigrants’ cash flows (remittances). This means that less money will be around. People won’t have the ability to buy some things the bought before and the total sales may go deep down.

6 Foreign Direct Investments.


Bank savings will also decline and the possibility to invest somewhere will be lower. This will bring a chain reaction to the whole economy of Albania, even if it’s just one factor making the whole mess.

■ The reduction of FDI. This can be easily justified with the fear that different countries have in extending their trade relations in periods of big crisis. Economies tend to be less expansive, especially those that are fragile. In the case of Albania, FDI-s are a real development tool and if this tool is missing, then the economy will have its own decline period.

■ High food prices. This is just the result of the high commodity prices worldwide, that affect the production of food among other products. This can bring higher price levels and lead to inflation, that might rise in an uncontrolled way.

■ Lower exchange rates. This means that the ALL will be stronger compared with the foreign currencies, such as Euro or the USD. This automatically means less exports, less regional trade and a lower GDP.

■ Restricted access to bank loans. This means that it will be more difficult to get a loan from a common bank, because of the restricted possibilities of the banks to credit their clients.

■ Worse trade balance. This is related to some of the above impacts and means simply that the ratio imports/exports will rise on the imports side. It is stimulated by the combination of several economic developments stated above.

■ Weakening the house market ■ Reduction of interest rates depending on the exchange rates

4 Implications of the Greek financial crisis for Greece, the Euro zone and Albania

Let us denote first that it is not in the interest of any country to let one member of the EMU to run away from its debt obligations, as the associated political and economic costs would be substantial for everyone. There will be a general confidence loss in ability of EU to deal with its fiscal and wider economic challenges. If Greece is let/forced to default, contagion to other Euro zone bond markets and Euro zone financial institutions, that hold significant part of the Greek bonds, is a strong possibility. Debt crisis in one member country of the Euro zone might trigger a more general crisis involving other Euro zone countries perceived to be “fragile” and have similar budgetary problems (like Spain, Ireland and Portugal). Spillover from Greece into Balkans might be possible too via trade and, more importantly, via financial links. Financial links via Greek banks are widespread, since Greek banks have a considerable market share in Balkans and the south-eastern European economies and


they are among the more aggressive lenders in these countries. Moreover, if Greece is let/forced to default, Greek commercial banks which hold government debt will be in trouble too.

By all means, credibility of the euro is currently at stake but too much political capital has been invested in it throughout the years to let it die. At the moment there is no consensus among the EU member states to move towards political union but, it is absolutely imperative to design and implement an institutional budgetary framework for supporting financially countries that face fiscal difficulties. There is a need for a “close and increasingly binding coordination of national economic policies, combining incentives and sanctions, coupled with effective surveillance and conditional assistance” (Tsoukalis, 2010). However, at this moment it is clear that there is no consensus within Euro zone member states to move forward into a more coherent political union that would allow the transferring of budgetary and tax responsibilities to supranational authorities (De Grauwe 2010d, 2010e).

4.1 Relationship between Greek financial crisis and the Albanian economy

The Albanian economy is inter-connected to the Greek economy in different ways. There were three main channels through which the two economies were linked: Albanian immigrants’ remittances coming from Greece, Greece being Albania’s second-biggest trade partner and three Greek banks operating in Albania, which comprise one-fifth of the Albanian financial market.

The Greek debt crisis could have an impact on Albania’s foreign trade, remittances from 650,000 Albanians living there and the cost of lending by Greek banks. Remittances, which have been a driving force for the Albanian economy for the last 20 years, have shown a declining trend in the last couple of years.

Greece is our second-biggest trade partner, but this is much more relevant to imports than exports. Exports to Greece cover 12 to 15 percent of overall Albanian exports, adding that although this was not insignificant, most of the exports were basic minerals and low value-added goods, which are less sensitive and might even have a positive elasticity in the Greek crisis.

Thus, the Albanian economy has been hurt by the Greek crisis, but not as much as had been thought. As the Greek economy strives to recover from its debt crisis, neighboring Albania has been performing well economically. Experts say that although remaining unaffected by the Greek crisis would be impossible, its impact has not been severe.

The deteriorating economic conditions in Greece during 2010 and 2011 are in stark contrast to the relatively stable economic conditions which prevailed in Albania during the same period. The Albanian economy experienced reduced levels of economic expansion during 2010 and 2011. However, Albania’s levels of economic


expansion for 2010 and 2011 are, with the exception of Kosovo, the highest growth figures in the Balkan region (World Bank 2011).

Table 5.1 — Annual percentage of GDP - Greece, Albania. Source: World Bank, November 2011.

Year 2007 2008 2009 2010 2011Greece 1.2% 1% -2% -4-8% -5%Albania 6% 7.7% 3.3% 3.5% 3%

The deterioration of the Greek labour market in 2010 and 2011 is also in direct contrast to the conditions which prevailed in the Albanian labour market during the same period. While unemployment level in Greece during between 2008 and 2011 more than doubled, the unemployment levels in Albania during the same period have remained relatively constant.

Table 5.2 — Unemployment percentage - Greece, Albania Source: World Bank, November 2011.

Year 2008 2009 2010 2011Greece 7.7% 9.5% 12.6% 17%Albania 13.1% 13.5% 12.5% 12.1%

These are some other indicators that the impact of the Greek financial crisis isn’t yet as severe as thought, but, as in the case of other regional economies, there might as well exist a time lag.

On the other hand, despite hardships endured by businesses established in the regions near the Greek border, experts say the crisis has caused some Albanian businesses to expand relations with other western European countries.

In the current situation, Albania has a lot to gamble on its future as related to the regional economic environment, and, more important, related to the EU zone. This means that the economic crisis that has affected most parts of the world actually will seriously be a way to measure our country’s economic capabilities to face such situations in the near future.

We all know that we have a fragile economy, partly because of the long and annoying transition process that our country has been going through for the last 18 years. Meanwhile, other countries of the same region, that have only 18 years of existence, are now proud to be closer than ever to the EU, just a few years away from being part of it.

The economic crisis certainly will affect the integration process and will slow it down in a way that will leave us hopeless, but that’s not the case. The important thing is to create the right economic environment so as to maintain the required macroeconomic


stability for integrating in the higher economic and political organizations.

5 Recommendations ■ The economic crisis is still going on and its primary target is the

personal income of the individuals, especially those coming from the low-income levels. There should be made several decisions in order to help these people pass this critical moment.

■ The government should focus its investments in the public services, by building new national roads, railways, new schools and also new healthcare systems.

■ Politicians or experts should continuously monitor the activity going on in the banking sector carefully and be prepared to take into account external support, not only on currencies, but also on the banking systems

■ Developing countries, and even the most developed countries should not be following a protectionist policy, if they are in the middle of the crisis, because that would only make things worse

■ The countries’ governments should invest as much as possible to invest in minimizing the gap between the high demand and the low offer and they should also strongly encourage new efficient ways in order to keep the balance between the offer and the demand for goods

■ The economic crisis brought in many cases higher imports than exports. To reduce this gap created, and to be finally independent from the import of food products, several countries with unused agricultural capacities, should try to implement programs that raise the agricultural productivity and R&D in the agricultural sector. Related with this is also the expansion of the rural road system, very important for the development of the rural zones.

■ There is high risk that the economic crisis could bring a food crisis. To prevent this, governments worldwide should take some precautions, such as putting off export barriers with their neighbours, assuring sustainable financing for the local agencies that deliver food and also they should improve the coordination with other countries in getting the right information anytime, anywhere about the global food reserves

6 ReferencesAlbanian Ministry of Integration, Reports, Official website.

Albanian Ministry of Finance, Reports, Official website.


Milo, Paskal. “European Union”, Tirana, 2002 (in Albanian).

Development Economics Web Guide, Unit 5b, “Factors affecting economic growth in developing countries”, May 2003.

De Grauwe, Paul. 2010d. “How to Embed the Euro zone in a Political Union.” VOX Research-based Policy Analysis and Commentary from Leading Economists. http://www.voxeu.org/index.php?q=node/5166.

De Grauwe, Paul. 2010e. “Fighting the Wrong Enemy.” VOX Research-based Policy Analysis and Commentary from Leading Economists. http://www.voxeu.org/index.php?q=node/5062.

IMF

Malliaropoulos, Dimitris. 2010. “How much did Competitiveness of the Greek Economy Decline since EMU Entry?” Eurobank Research, Economy and Markets, 5(4): 1-16.

Tsoukalis, Loukas. 2010. “We can’t Go On Like This.” ELIAMEP Special Paper. http://www.europe2020.org/spip.php?article633&lang=en

Vlamis, Prodromos and Karousos, Evaggelos. 2010. “The Greek Banking Expansion in the Balkans: An Overview of Developments in the Light of the Recent Financial Crisis.” Mimeo (in Greek).

World Bank, ‘South East Europe Regular Economic Report’, November 15th 2011.

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Efficiency of collateral execution in Albania

Elsa Kristo

MSc. in Finance, Head of Internal Audit Network Branches Department, Raiffeisen Bank, Alb. @: [email protected], [email protected]

AbstractBanking sector in Albania even if resulted with profit, has a raising level of

non performing loans by reaching at 18.8% of total portfolio as of December 2011 compared to 14% as by the end of December 2010. The financial crisis has its own impact worldwide as well in Albania however the paper will be focused on the local factors that characterized the increased non performing loan portfolio and the difficulties during its recovery process such as the efficiency of collateral execution. A special attention will be paid to the functioning of the private Bailiff Offices. They have started to operate as a need since the process of collateral execution in Albania was the longest in the region. As a conclusion the paper will presents the strategy of Albanian banks for year 2012 with regards to the efficiency of collateral execution for non performing loan and the challenges of Private Bailiff in this process.

Key Words: Non performing portfolio, collateral, bailiff, repossession.

JEL classification: G01, G21


1 IntroductionYear 2011 in Albania was characterized by a distressed economic and political

environment, especially political crisis deteriorated during January 2011. Economic crisis has started since 2009 by affecting some macro indicators as inflation, unemployment rate and remittances. The natural decrease of remittances in the Albanian economy has been pushed along by the economic crisis that has affected neighbourhood countries, where the number of Albanian emigrants is higher

The sector that indicated growth during 2010 – 2011 is the Industry, while Post Telecommunication and Construction decreased. Construction which remains non performing loan driver since the beginning of crisis has low chances to recover in 2012. Difficult development occurred during 2011 in the Gas Trade activity considering the “virgin naphtha” scandal and seizure of one of the main Gas Station by Bailiff. Still there is a high level of uncollectible or delayed receivables from government toward private companies. No improvement are estimated, as 2012 state budget is the lowest in the last years, while public debt is very close to 60%.

Legal environment is very difficult and in almost all the cases under execution process there is at least a claim from the debtors to suspend bailiff actions delaying the whole process. Another concern is the considerable difference between the collateral price evaluated by external evaluation companies before loan disbursement and the collateral value evaluated by Bailiff Office.

In Albania there is a very low market potential for purchase of collaterals especially during auctions period. In specific cases potential buyers prefer to purchase assets under the bank ownership and not in bailiff auction to avoid conflicts with the debtor. Another concern has been the lack of Credit Bureau until 2008 by exposing the banks toward an increasing credit risk especially for customers highly leveraged previously. Starting from November 2010 in the Credit Bureau is reported as well customers for 5 other credit institutions.

For the unsecured personal loan there are different reasons of delinquency related more to individuals living affecting the non performing loan in early and late stage. The main reasons are related to the increase of living expenses, delay in salary credit, no knowledge of the debt (fraud), customer unwilling to pay or being abroad.

Elsa Kristo 55

45%Bad loans

30%

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18,216,8

11,18,0 8,0

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Raiffeis

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Bank

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Intesa S

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Emporiki B

ank

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Figure 6.1 — Bad loans December ‘10 and December ‘11.

2 A brief overview of the approaches on collateralCollateral or the property pledged, in order to be sold by the bank when the

client does not repay the loan, should be considered as a way to encourage businesses and individuals to pay off the loan. There is always space to be exploited in order to close the loan repayment obligations of businesses without going to the enforcement of collateral. Of course, there will always be some businesses and individuals who have exhausted all possibilities for such a conclusion. What should be avoided is the problem of cold treatment by the banks, as they are in the same line with the businesses on which they believed by giving credit. There is no reason for the banks to see the credit problem without taking into consideration the touch of their profit. If the client has failed, the bank has failed as well.

A bad loan from a business was not created today, but is created in those years, when banks have reaped profits over 20%. This means that, as enjoyed higher profits when lending activity was in good quality so must face the problems arising from the bad loans and not intended to transmit any loss to the customer when problems occur. It is easy for the bank to avoid a loss today by charging all losses to the client, but that, directly or indirectly, will influence the banking system and economy in the near future.

Not every business that shows difficulties in repaying bank loans must be seen as having mismanaged the funds given by banks. Banks are not allowed that in conditions of crisis like this last one, to take panic and apply more stringent techniques, adding problems for affected businesses. If the bank goes without hesitation in enforcement of


collateral, then it is a blow to the Albanian business and indirect damage to the banks in general for the whole economy. As bad loans during the past two years has been increasing and currently has caught double-digit levels, the analysis of this problem should start from the source of the problem. During the recent financial crisis in the U.S., one of the main causes was the mismanagement of the banks. Their managers effectively increased lending activity beyond market potential, with the sole intent to benefit from increased rewards from the credit volume (Leskaj B, 2011).

3 Key steps in bailiff process in AlbaniaAlbanian banking system estimates approximately 150 million EUR property

pledged as collateral, which can not be sold due to lengthy procedures and often speculative taking place in the courts. Block of these collaterals increase the risk of lending money and consequently, the willingness of banks to give loans.

Once the bank selects the “Exit Strategy” with the customer mainly when he is 180 days past due, prepares the file to be send to court and deposit the court request. After receiving the court decision within 30 days the bank notifies in written the customer for the court decision obtained. A 10 days period is needed to send the court decision to the debtor to increase the pressure. If the debtor does not react within 5-6 days, the file is sent to Bailiff office. The deposit procedure lasts only one day. Bailiff notifies the debtor for voluntary execution. Execution procedure starts after 15 days.

Bailiff starts forced execution if no agreement is reached between Bank & debtor (conservative sequestration starts with debtor/co-debtor/ personal guarantor’s bank accounts, movable& immovable collaterals, and other properties).

An independent appraiser is appointed by Bailiff to perform evaluation of the respective collateral. In case the evaluation is accepted by both Bank & debtor, Bailiff proceeds with appointment of auction date.

1st auction property is generally discounted by 20% of the agreed initial price.

In case of not successful auction, Bailiff proceeds with the next round of auction.

2nd auction property is generally discounted by an additional 20% of the first auction value.

In case of not successful auction, Bailiff submits a notification to the Bank proposing to take over ownership of the collateral.

Bank has to notify back Bailiff within 5 days either accept ownership of collateral with the discounted value of the second auction against reduction of exposure with respective value, or refuse ownership of the collateral, which means releasing all sequestrations.

The bank still has the collateral registered in its favor and legal right to claim on it but must restart Bailiff procedures from the beginning, including all costs.

Elsa Kristo 57

The law permits to the debtor, the right to claim in Court at any stage and for any action during Bailiff procedures delaying the process..

4 Main concerns during the collateral execution process in the Public Bailiff

Throughout last year the prolonged lack of liquidity faced by the businesses put banks in front of increasing difficulties in collecting the loans given to them. After using all the methods of debt collection and having exhausted all other options to keep the borrower business active, banks are obliged to undertake the process of compulsory execution of collateral a crucial process to maintain a healthy banking system and especially to protect depositor’s money.

In many cases, negotiations between banks and customers have resulted in the restructuring of loans, to give a greater breath of business performance.

Naturally, there have been cases of complete inability of borrowers to repay their obligations, cases which have ended in court proceedings until the execution of the mortgage.

It is this phenomenon - the execution of the collateral - which has been a concern for the banking industry. This process has encountered many obstacles. But what is more evident is the fact that the obstacles to the execution of collateral are not related to the market of immovable / movable properties but rather to regulatory and organizational issues as well to the law enforcement.

Problems come out at the time of execution with the ownership of properties that are used as collateral, problems for which the banks were not aware and followed from other inconveniences as:

■ There are inaccuracies in the registration system of real estate and lack of information in the ownership files;

■ Extension of compulsory execution proceedings; ■ Suspension of enforcement actions by the court, not meeting the legal

criteria up to the ignoring of the bank arguments; ■ Banks are not called as third-party, violating the principle of a due legal

process. The court takes a decision without the presence of the credit party (bank), and consequently, without examining the damage done to this party, violating the principle of equality of arms and extending for months suspension of enforcement process;

■ Furthermore, is noted that the possibilities of suspending proceedings increase with increasing amounts that are in process of execution;

■ Another claim by the banking industry is related to the court decisions.


Significant delays in issuing execution orders lead to overcome the legal terms in the trial of cases.

Unfortunately, it is observed that delays in the trial have pushed debtors in failing to paying the loan, favoring borrowers with problems.

Apart from the problems encountered in the courts, there are a number of issues encountered during enforcement procedures.

■ Fictional setting of seizure or possession of the item; ■ Speculative price reducing of the item, to damage the interests of the

creditor; ■ Lack of procedures for real estate, built without planning permission; ■ Lack of transparency and ensuring integrity of a process for items in

execution

Once private enforcement system was established, many bankrupt borrowers have discovered the claim manner in the court for the assessment of their property evaluation conducted by private Bailiff. Given that the aim of debtors is delaying the execution time, no matter if the evaluation conducted by bailiffs is high or low. The value of collateral is determined once at the time of taking loan, but in recent years, commercial value of many properties has fallen. Borrowers have the opportunity to actually complain to the court for the amount of property valuation and the court must enter in a process where an independent expert determines the performance of alternative assessment. Even if this procedure ends, the borrower has the right to appeal to the Court of Appeal. Here, banks have to wait one to two years until the Court of Appeals find the time to review the claim. With this legal scheme, collateral execution is postponed for several years, during which the bank expects to recover its money.

Bankrupt borrowers who choose to cause delays in execution of collateral are also lost because penalties and interests are accrued by the banks up to the selling property. Consequently, the borrower’s financial situation continues to deteriorate. Meanwhile, banks increase their risk provisions, to cover possible losses from bad loans and therefore, the economy slows.

According to banks, there is a high correlation between the value of collateral and cases where the courts decide in favor of the borrower, which costs a shadow of suspicion for corruption in the justice system. This means that the higher the value of collateral, the higher is the probability that the court will order the suspension of execution.

Various arguments are used by the court for suspension of enforcement actions such as: the debtor declares that he has not taken notice that at the time of notification has been ill in hospital etc.

Thus, by banks has been noticed that the borrower is suing the bailiff, and the bank is notified on the suspension of the execution only after the court decision has become “fait accompli”.

Elsa Kristo 59

5 Banks’ responsibility on the collateral acceptedCollateral execution process for many loans granted, especially to businesses, has

highlighted the quality of collateral accepted by banks. So, the banks have agreed to accept collateral which are located in peripheral areas or in villages, with a reference price highly inflated. Thus, different surface land in village centers, were accepted for collateral against the high price per square meter. To find buyers at such a crisis time is always difficult and auctions organized for sale of such properties have consistently failed.

During recent years, Albania has had numerous cases where different businesses have put as loan collateral not appropriate properties as for example basements declared with a “perspective to be convert in pub”, stores without windows or land in remote areas of the country, which, though having a nominal value, can not be sold. During 2004-2007, banks were under increasing lending fever, and did not think of the quality of properties that received collateral. Recently is pointed out the fact that the banks have often performed procedural errors used by customers to suspend the execution.

In the case of collateral that has trouble running, is not simply the responsibility of the courts, the responsibility of enforcement, but it must be seen the way of accepting the collateral. In many cases it was found that the collateral received had legal uncertainty. Banks often have accepted as collateral constructions without permission, which has further complicated the recovery process. According to a unified decision of the Constitutional Court, legally constructions without permission do not exist, but the legalization process has provided a semi legal status, while the debtor can pass from nonentity to status “in the legalization process,” according to the interest of the moment, effectively blocking the execution.

6 Economic impact of the collateral executionThe economic impact derived from the failure to execute in time the collateral

is significant. Total outstanding liability from debtors who are in the process of executing the collateral amounts to approximately 20 billion LEK. Although the value of the collateral is nearly 2 times higher than the value of the liability, and more than sufficient to liquidate these obligations, uncertainty and delays in the execution system makes the compensation for the banks a harder target to catch.

Performance indicators of the banking system are also affected by the absence of rapid execution of collateral. Bad loans have risen sharply the past two years, and a significant role in this indication has played the inability of banks to withdraw guarantees, which would enable them to write off the bad loans that will be compensate with the collateral value, thus improving the indicators. Beyond that the cost of funding in some sectors has increased, as it is increased the reluctance of banks to borrow more real economy.


Over all the impact on the trust is among the most important. An uncertainty of banks to execute on time and quality of credit guarantee, it is likely to become more conservative on their approach lending. At the same time problems in the execution of collateral creates difficulties in terms of generating sufficient liquidity to flow from this execution.

7 Why the Private Bailiff was a need in Albania?The low performance of the Public Bailiff service mainly related to delays in the

conduct of proceedings and accuracy of tracking the legal deadlines during enforcement process lead the need for a fundamental improvement of the service of bailiffs’ offices. The reports (Surveys) of prestigious international institutions show that the duration of the collateral execution process in Albania was among the longest in the region, often reaching up to 12 months from the time of application for compulsory execution.

The old service gaps was not related only with state delay in the completion of execution but also the organization of auctions and the announcement of the acts directed to the parties in a execution procedure, making the whole execution process move back in courts after the claim of one of the parties. The suspension or resumption of procedures extends the execution even more. Initiative of the Ministry of Justice to adopt privatization reform in enforcement service is based on the advanced practice of some countries, especially those using the legal system of Common Law (mainly U.S. and UK).

After the reform, which started two years ago, the law on Private Bailiff Service was approved and added to state bailiff service also the private bailiff. Until now, are completed two exams for taking the title and the licensing of private enforcement agents and are allowed to open their office 63 private enforcement agent. Transparency and reduction of corruption was an imperative need for the creation of private bailiff service. Also increasing pressure from banks community in Albania, due to continuous increase in recent years of bad credit, brought the need for improved bailiff service. The introduction of private service that is based on the promotion of private bailiffs from the profit that comes from paying the bailiff fee is expected to change the service in terms of quality, efficiency and execution speed. Another need for the creation of this service is the reduction of budget expenditures and reducing the workload of the State Bailiff.

8 Private Bailiff efficiency during collateral execution process

According to official data from Tirana Bailiff ’s Office out of 1200 loan files only 5-10% of them are treated by the state (only loan files of National Commercial Bank - BKT). Over 90% of loans sent to Bailiff are secured by collateral. As by Bailiff feedback consumer loans (without collateral) are more problematic.

Elsa Kristo 61

Strong competition between the two services and public dissatisfaction over the state service has made the commitment of private bailiffs to be even bigger and becoming a success story. Like the other free professions as lawyer or notary, private bailiffs compete to find customers and bring as many of them being so driven to improve the quality of service. Also National Chamber of Private Bailiffs has concluded cooperation agreements with the State Police and the Central Office of Real Estate. Good relationship and cooperation with these institutions quickly helped substantially faster execution of executive titles.

Another opportunity of private Bailiff for the execution of executive titles is that specialized people investigate and find the debtor’s financial resources, investigation which has left much to be desired when provided by state Bailiff. Private Bailiff assumes responsibility for the execution of court decisions that would also mean that both the creditor and the debtor will face a credible private service because no one would oblige the citizen or entity to go to this or that Bailiff. Private Bailiff and creditor relationship is in the position of business & taxpayers, meaning that this relation is subject of offer – demand and if the incomes are not realized the business will go bankrupt. The concept of allowing simultaneously both state and private Bailiff makes the creditor free to choose according to his belief and without restrictions require enforcement by a private or state agents as well as a private enforcement is free to accept or not an issue to execute. Currently the data received from the Chamber of Private Bailiff shows that 80% of the creditors are directed to the Private Bailiff, although tariffs set by law to be paid in the private service is higher than in that state.

In the first year of operation of private bailiff collateral execution performance is satisfactory and has a progressive increase. Out of 80% of cases that have applied for execution at private Bailiff are executed in a relatively short time, the rest from 15% to 20% is executed after completion of judicial processes. From the loan files of 2011 handled by private bailiffs in 60% of the auctions the collaterals are repossessed from the Banks. In 25% of cases the collateral is purchased by third parties and in 15% of cases the collateral is turned back to the debtor (in case of sale failure) as the Bank has no interest to take the collateral towards the credit.

The experience has shown the need for independence of this service. The collateral execution, in case of its realization by the private enforcement service offers a parallel system to the state Bailiff by adding value in terms of speed, de-bureaucratization, efficiency and competitiveness. This practice is followed today in some European countries to avoid and minimize problems that exhibit the auction procedures in collateral assigned for banks credit.

9 Challenges that should affront the Private BailiffBailiffs have encountered many difficulties for the compulsory execution of

collateral, a process essential to the execution of executive titles. By law, the process of collateral compulsory execution begins after the bailiff has used all other means of


notification for collection of debt.

Key issues in the compulsory execution of collateral remain the inaccuracies in the records of Registering Office of Real Estates of the Republic of Albania. The registers of the properties are held manually by creating difficulties in the identification of real estate under debtor ownership and leaves room for many inaccuracies and overlapping properties. These inaccuracies adversely affect the execution of mandatory collateral.

Another problem is the way of providing information required by the bailiff, by Registering Office of Real Estates. Bailiff officers for execution of judgments should stand in long queues with other citizens in order to be provided with the acts required by Registering Office of Real Estates. This procedure weakens the efficiency of execution of the collateral. Another reason which increases the difficulties is that Registering Office of Real Estates response in most of the cases does not meet the legal deadline. For this problem the National Chamber of Judicial Private Bailiffs has complained in Central Office of Real Estates and recently an agreement is in place to improve cooperation.

Other challenges Private Bailiff should face are:

Improving the resistance of executive actions and shorten the execution process in court. It is a fact that most of the enforcement procedures are attacked in court. In many cases, the court has led to delay in executing the litigation bringing consequences for the creditor. The juridical doctrine rightly states that “A claim against the decision of the court which issues the execution order should not be allowed, as it is aimed the delay of the execution”. Control of the court should rely only on cases that the order issued containing a prescribed right or if in the order is made an extensive interpretation of the contents of executive title. Both cases serve the debtor’s right to be protected by executive title objection as provided in section 609 of the Code of Civil Procedure. During the challenge phase of enforcement actions, the court need only to assess the abovementioned cases without entering in the base of the relationship creditor - debtor.

Executive titles expansion. Executive title stands as a prerequisite for any forceful execution. In banking relationships are introduced services offered to the Albanian client such as overdraft or credit cards. Execution of the right acquired recognizes the development and refinement of the law and as such must necessarily find the same standard of legal regulation.

Increase access to parties in the implementation of enforceable titles, through the notice and posting of list of bailiffs. Publication of state and private Bailiffs nomination list simplifies procedures for determination of bailiffs by the creditor, avoid monopolies that can be created and increase competitiveness of service delivery.

10 ConclusionThe issue of collateral is a public issue. Banks are private companies but operate

in a market entirely specific and sensitive. Banks manage the deposits of citizens.

Elsa Kristo 63

And when it comes to execute the collateral, it is not to protect the interests of bank capital, of a private business, but has a wide impact on public interest to protect the deposits of citizens. If Albania was unharmed during the period of global economic crisis, this was because the banking system was safe and there was no need for budget intervention, otherwise Albania would have suffered, perhaps even worse as some economies of the largest countries in the region. So when it comes to enforcement of collateral, it is about to guarantee customers deposits, the depositors confidence and is in interest of not only to citizens, but to the business as well to maintain a reliable system where individual deposits are in safe.

Bank of Albania, as the central banking institution in the country, should play a more active role in creating a sustainable climate. This institution also has a duty to analyze the real reasons of the problems associated with banks bad loans. One of the sources for leading to bad loans is the mismanagement. Also, there is no doubt that some of them are due to “corruption” of loan officers who have handled with loan portfolio and sometimes up to bank management. Many loans are approved despite they did not meet the approval criteria for the only purpose of achieving the targets set. Bank of Albania, of course, should be aware of these problems and take measures to minimize them in the future. In the policies of this institution, it is important the relationship between the lenders (banks) and borrowers (businesses and individuals) should be characterized by transparency, flexibility and long-term relationships.

While banks’ policies should avoid rigid and strict practices, and become more dynamic and appropriate for economy stages.

Also they should improve the quality and quantity of the existing portfolio and to focus in targeted industries, i.e. Hydro Power Projects Financing, infrastructural Projects, Production and trading, to increase the profitability margins by focusing in fees and commissions and non-interest incomes. Banks should be more conservative during collateral acceptance as collateral Execution is a painful process for the bank which requires a lot of efforts, time, expenses and risks. Restarting the execution process, may not provide value added for the bank.

Liberalization of bailiff services is value added in terms of speeding up, simplifying, increasing quality and efficiency of enforcement services due to competition. Banks are expecting now the transparency missing, rapid implementation of court decisions and minimized corruption cases. This is the big challenge for the Private Bailiff.

11 ReferencesAlbanian Association of Banks, Annual Report, 2010.

Bank of Albania, Annual Report, 2010.

Bank of Albania, Semi annual Financial Stability Report, 2011.


Bank of Albania, Monetary Policy Report, 2011.

Bode, R. (2011), “Collateral execution”, Open Forum: Collateral, Loan, Market and Legislation, Bank of Albania.

Erebara, Gj. (2011), “Collaterals, Albanians skip their obligation toward banks”. Shqip Journal.

Erebara, Gj. (2012), “Courts block 100 mio EUR collaterals”. Shqip Journal.

Fullani, A. (2011), “Collateral, Loan, Market and Law” Open Forum: Collateral, Loan, Market and Legislation, Bank of Albania.

Leskaj, B. (2011), “Collateral execution or Loan rescheduling?”, Panorama journal.

Kasmi, B. (2011), “Banks count more on private Bailiff” Open Forum: Collateral, Loan, Market and Legislation, Bank of Albania.

Kougionas, I. (2011), “Our Proposal on collateral execution”. Bankieri Magazine.

Sejdarasi,B. (2011), “Is the honeymoon time for banks and business over?”. Bankieri Magazine.

Dossier (2011), “The collateral and its economic impact”. Bankieri Magazine.

RISK

OBJECTIVE

MA

NA

GE

Impact of economic crisis on migration: evidence from Albania

Perseta Grabova,* Elona Pojani**

Department of Finance, University of Tirana, Albania*MSc. @: [email protected]**MSc. @: [email protected]

AbstractBased on a survey which was conducted during January 2012, this study, aims to

find out the main consequences of the current economic crisis on Albanian households and the impact they have had on migration decision. The target groups of the analysis are young students, who are considering the possibility of studying abroad and students/professionals who are currently studying/working abroad or who have studied/worked abroad and now have returned to Albania. The content of the survey addresses issues related to income level, family background, employment possibilities, level of salaries, working conditions, social environment, and public policies. The conclusions of the study are that the most important impacts of the economic crisis are the reduction of the rewards from work and the decline of quality of life. As the effects of the crises affect the migration decision of Albania and thus the future patterns of migration, identifying push and pull factors of migration is crucial for future macroeconomic and social stability.

Key words: migration, economic crisis, public policies, remittances, Albania


1 IntroductionInternational migration has had, and will continue to have serious consequences

to the economy and social and cultural structure for both the countries of origin and destination. Recent studies (WB, 2003 and Skeldon 2002) in this field have focused mainly on the relationship between international migration, brain drain, and economic growth. Understanding people’s reason for migrating might help to predict current and future migration flows. This way, both countries of origin and destination can more effectively plan positive and negative economic and social consequences.

Albania has witnessed different patterns of migration in the last two decades. The change in the economic and political conditions in 1990 created new opportunities for Albanian population anxious to discover western countries. In fact, huge migratory flows occurred during 1990-1999, but their causes and consequences where not the same in each occasion. The major emigration flows to other countries have occurred after strong economic, political and social crises. Public statistics (Gedeshi, 2006) has estimated that more than 25 percent of Albanian citizens live abroad. No other Central or Eastern European country has witnessed such figures of emigration in less than twenty years. Academic literature in this field (Gjipali 2003, Vullnetari 2007, EMA 2010, Azzari, Carletto 2009) agrees that unemployment, economic crisis, poverty and education remain the main reasons for Albanian migration. After 2000, with the improvement of economic and political situation in Albania, emigration flows also stabilized and changed in nature. Today most emigration flows happen especially among young population for study purposes. Indeed, Albanians professionals and students consider migration as an investment in their future. Moreover, if they decide to stay in the destination country, this will also impact long-run development of the sending country, since it would lose not only the current but also the future stock of human capital.

Due to the current crisis that is affecting especially neighboring countries, it is very likely to see a significant reversal in the flow of migrants between foreign countries and Albania (Korovilas, 2011). This happens because in time of crisis the migrant workers lose their jobs due to the false perception that “migrants take jobs” or “compete for welfare benefits” (IOM, 2009).

Based on a survey which was conducted during January 2012, this study, aims to find out the main consequences of the current economic crises on Albanian households and the impact they have on migration decision. The target groups of the analysis are young students, who are considering the possibility of studying abroad and students/professionals who are currently studying/working abroad or who have studied/worked abroad and now have returned to Albania. The paper will first describe the characteristics of migration in Albania, in the two periods: 1991-2000 and 2001 to present. Next, the paper will emphasize the current migration tendency among the target group, highlighting the consequences of economic crisis. The content of the survey addresses issues related to income level, family background, employment possibilities, level of salaries, working conditions, social environment, and public policies. The paper offers statistical analyses of the data and relevant results. Finally, the

Perseta Grabova,* Elona Pojani** 67

paper concentrates on public policies which should be developed and implemented in both origin and destination countries to address migration consequences.

2 Emigration patterns in Albania since 1990During the communist era (1944-90), migration was officially prohibited, and

severely punished. After the fall of the communist regime, international migration became a common phenomenon in Albania. Studies by King and Vullnetari (2003) and Vullnetari (2007) identify 4 different episodes of migration flows during the period 1990-1999. The first episode is linked directly to the summer of 1990, when about 20,000 Albanians left the country. The second episode is known as “The Main Mass Exodus of March and August 1991”, when after the first democratic elections (won by the Communists), the first and second ‘boat-people’ exodus to southern Italy occurred. 25000 migrants of March 1991 were accepted and settled in Italy, but most of the 20,000 arrivals of August 1991 were repatriated. While clandestine migration continued to Italy, a larger-scale but un-quantified exodus took place to Greece. Altogether during 1991–93 about 300,000 Albanians, 10% of the population, left the country. The third episode is linked with the collapse of a pyramid schemes in spring 1997. This chaos produced other episode of boat exodus to Italy, which encountered tragic circumstances. As before, larger but unregistered crossings of the Greek border took place. Albanian communities of other EU countries increased by new arrivals and the evolving Diaspora network spread to the UK. The forth episode happened after the Kosovo crisis of 1999, when many northern Albanians mixed themselves in with the Kosovo population outward migration to other European asylum destinations.

The years 2000-2007 were characterized by relative stability and consolidation of emigrant communities abroad. During these years, the Albanian economic and political situation gained more stability as the recurrent crisis and emergency situations of the 1990s had come to an end by 2000. This year also marks the end of large-scale mass emigrations. However, although this period is regarded as relatively stable, there has been further social, demographic and economic polarization of the country, not only in terms of individuals and households, but also regionally. Indeed, the rate of internal movement to urban areas (especially to Tirana, the capital) has accelerated significantly. Tirana alone was struggling to accommodate and service an increasing number of migrants coming from rural and remote areas of the country who concentrated in its poorest neighborhoods. Consequently, rising urban unemployment has been a strong motivation for young adults to emigrate abroad (Markova, 2007). In addition, during these years, further regularization took place in Greece, Italy, UK, and as a result several migrants were able to benefit from these measures and consolidate their stay in these host countries (Vullnetari, 2007). Under these circumstances, the typology of Albanian emigration has undergone profound changes. Thus, the profiles of people emigrating, destination countries, and ways of migrating changed. In this period, young Albanians increasingly left the country


mainly for study purposes1, rather than for employment opportunities.

After 2007, the economic crises that have affected the world have had their impact on Albanian emigration patterns. Direct and indirect policies of sending migrants home are common for the countries affected by the crisis, while the same emigrants, facing employment difficulties, have also chosen to return to their home country. Adoption of more restrictive immigration policies to protect the local labor market results in a lower demand for foreign workers. For example, a reduction in the number of migrants to be admitted for employment has already been announced in some countries (Italy, U.K.) or is under discussion in others (e.g. Australia). In addition, in Spain, the Government has introduced financial incentives to encourage unemployed migrants to return home (IOM, 2009).

3 Survey analysis

3.1 Aim and motivation

Reasons for emigration can be categorized according to push and pull factors. The ‘push’ factors for Albanian emigration have been evident throughout the first decade of transition. They relate primarily to the disastrous economic conditions of the country; the demographic features of Albanian society marked by a large percentage of young people accompanied by high rates of unemployment; the political and financial crisis of the 1990s, etc. The pull factors in the same period were: higher wages in the West; better living conditions; better opportunities for the future of immigrants’ children; personal development; the glamorous images of life in the West as portrayed by foreign television, particularly in the Italian case (Vullnetari 2007). However the nature of pull factors after the year 2000 has slightly changed. In this period it is noticed a larger movement of Albanian students who are seeking better education in Western Universities.

This survey seeks to identify the relationship between migration decision and economic crises. The survey presents how long run effects of economic crises in Albania affect the decision of Albanian students and professionals to go/stay abroad for studies/work. The results of the survey will serve as a base for compiling future public policies related to migration. This study presents the summary of results for both target groups, while in depth studies related to each question or issue addressed in the survey will the object of future researches of the authors.

3.2 Methodology of the Survey

The survey was conducted during the period January 2012. The questionnaire was structured with yes/no answers, multiple choice, point and descriptive evaluation

1 According to EMA, 2011 approximately 2000 to 4000 students leave the country each year.


and checkboxes. The time required to fill it out varied from 5-7 minutes. Two target groups were chosen for this analysis.

The first target group consists of high school and university students who are about to decide their future education and qualification. The questionnaire was delivered to 7 public high schools2, 2 private high schools and 2 faculties3. We chose only high school students of the final grade. The geographical distribution was the criteria on which the selection of high schools was based (center and suburbs): a specific high school covers several neighborhoods thus a wide area of households. We chose the Faculties according to the specialty of studies (economy and social studies) and the number of students. All other elements used for the selection beyond that afore mentioned, were done completely randomly by the evaluators of the survey. The quantity of the sample was defined during the process of gathering the information, when the evaluator considered it enough due to the repetition of information. We identified and selected the high schools and faculties and established contacts with the School and Faculty directors through the information obtained from Regional Education Directorate (DAR) of Tirana and relevant Deans. After contacts via phone calls, the evaluator of the survey visited each selected school and faculty introducing the school directors and Deans of Faculties with the goal and other elements of the questionnaire. The identification of the high school students as well as university ones was enabled through the support of the teachers and professors’ staff.

The second target group consisted of Albanian professionals who have lived, worked or studied abroad and currently have returned to Albania or continue to live/work abroad. We have contacted them using electronic communications through our social network of students and professionals who are studying/working or have studied/worked abroad. The questionnaire was also distributed during January 2012, and in a two- week period 138 respondents filled in the questionnaire. The questions posed to this group are slightly different from those posed to the first target group since living abroad implies different social and economic status and other financial and social responsibilities toward their families living in Albania. We have tried to address these factors in the questionnaire. The nature of their responses differed from the former group.

The answers of both groups are compared with each other in the following sections. The participants of the first target group are still financially dependent on their parents, so the opinions of the respondents’ families might have had major impact in their responses. On the other hand, the respondents of the second target group are financially independent or at least might have had to manage their own expenditures, thus affecting their opinion about the effects of crises on consumption, salaries, social patterns etc.

All data were entered into an Excel database and analyzed by using simple statistical tools, such as frequency distribution, percentages, range, proportions and

2 Out of 23 public high schools in total in Tirana.3 Out of 8 Faculties of Tirana University.


mean. The results of the survey are represented through graphics and tables.

A number of limitations in methodology can be recognized. First of all, despite the anonymity in filling in the questionnaires, there remains the risk of under or over reporting of the figures related to the level of income, as they might have been considered as confidential /personal /delicate information. Furthermore, as most of the respondents lived mainly in Tirana, the viewpoint of the residents of other districts or of those living in rural areas have not been included. Due to the characteristics of regional development especially in the decades of market economy, Tirana differs significantly from other districts of Albania, concerning the economic conditions, lifestyle, social and cultural activities, the level and quality of education, the differentiations in access to technology of information in general, etc. Regarding the second target group, the limitation consists in the fact that the main way of contacting people has been through our social networks, limiting this way the range of potential respondents living in other countries, especially those living in Greece.

3.3 Demographic characteristics of respondents

Table 7.1 — First Target group.

A total of 415 high-school/undergraduate Albanian students

Gender 65% women (269) 35% men (146)

Age 77 % (319) from 16 to 19 years old; 23% (96) 20-23 years old.

Status of Education 57% (238) of respondents are high school students and 43% (177) undergraduate students

Future expectation about education

95% foresee to attend undergraduate or graduate studies (393), 4% (17) have not decided yet, and only 1% (5) are not going to attend undergraduate or graduate studies

Family Income status

1. <200,000 5% 2. 200,000-500,000 32% 3. 500,000-1,000,000 43% 4. >1,000,000 20%

Table 7.2 — Second target group.

A total of 138 highly skilled professionals who have lived, worked or studied abroad and currently have returned to Albania or continue to live/work abroad

Gender 69% women (95) 31% men (43)

Age From 19 to 47, with the overwhelming majority between 22 and 32.


Status of Emigration

1. About 36% of respondents have studied abroad and are currently working abroad; 2. 24% are students who are not working; 3. 18% have worked or studied abroad but now have returned to Albania;4. 15% or respondents are studying and working abroad; 5. 7% of respondents are living abroad.

Education/ Employment according to current location

1. Most of respondents are currently living in USA, Albania, France, Italy, Central Europe, Germany and United Kingdom 2. Most of the respondents were employed in the private and public sector (39% and 16%). Also, the group was composed of undergraduate and graduate students (19% and 17%). The others were self-employed or unemployed.

Family Income status

1. <200,000 5%2. 200,000-500,000 9%3. 500,000-1,000,000 22%4. >1,000,000 64%

3.4 Results of the Survey - First Target Group

One of the questions of the survey addressed to the first target group was: Where the student would prefer to study in Albania or abroad. Then out of them, those who have chosen to study abroad or haven’t decided yet were asked if they would consider returning to Albania after finishing their studies. The responses are shown in Figure 7.1 and Figure 7.2.

Figure 7.1 — Do you prefer to study in Albania or abroad? (left)Figure 7.2 — Are you going to return to Albania after finishing your studies? (right)

The most favorite destinations of the respondents to attend studies are: Italy, United Kingdom, USA and Germany. A considerable percentage (56%) of students are determined not to return.

We have selected the respondents who have chosen to study abroad and asked


them which of the impacts of the financial crises have affected their families. They have answered by selecting the importance of different impacts in a scale from one to five, where one is the case when the factor does not have any impact on their families and five is the case when the factor have affected their families very much. The results presented in Figure 3 represent the average score of each potential impact. The impacts which have the highest score are the most important.

Figure 7.3 — Which of the following impacts of the economic crisis have affected your family more?

All impacts have been considered of medium importance ranging in a score 2.7-3.3. The most relevant impacts are the decline of quality of life, where 48% of respondents have considered it as important or very important, and the reduction of salaries or other rewards from work, where 39% of respondents have considered it as important or very important. An issue that has been stressed out by the respondents is the return of their unemployed relative immigrants in Albania. 35% of respondents have considered this impact as important or very important. Also the reduction of opportunities for continuing higher studies abroad has been emphasized. 34% of respondents confirm that members of their families have lost their jobs due to the economic crisis.

Another question asked to score several reasons affecting their decision to study or live abroad. The results are presented in Figure 7.4 and Figure 7.5.

Figure 7.4 — Which of the following factors affect more the decision of Albanian students to study abroad?


Figure 7.5 — Which of the following factors affects more the decision of Albanian students to stay abroad after finishing their studies?

Along with other reasons, such as quality of education in foreign country, employment policies home and abroad, corruption, the level of the country development and long term effects of economic crisis are considered as very important factors affecting the decision of youth population to migrate.

3.5 Results of the Survey- Second Target Group

As we did for the first target group, the second target group was asked whether the student or employee who is currently studying/working abroad (not the ones that have returned to Albania) will consider returning to Albania after a couple of years. The results are shown in Figure 7.6.

Only few students express their willingness to return after a few years (19%), while a considerable percentage (33%) of them are determined not to return or are indecided (48%). The figures for the employees’ group is even more pesimistic. The vast majority of them have decided not to return, while the remaining generarly have not decided yet. Few are those who have chosen to return. This shows that despite the economic crisis in their current region, they still do not see better living possibilities in Albania.


Figure 7.6 — Are you considering returning to Albania after a few years? Left: Respondents who are currently studying abroad Right: Respondents who are currently working abroad

In a following question, as we did for the first target group, the respondents were asked to select the importance of different crisis impacts on their families in a scale from one to five. The results are presented in Figure 7.7.

The most important impact as in the first case is the reduction of the rewards from work and the decline of quality of life. 41% of respondent consider the reduction of the reward from work as important or very important impact. These reductions vary from 2% up to (in some cases) 80%. The vast majority of them confirms that the reduction have been in the range 10-40%. 33% of respondent consider reduction of consumption as a critical issue also the increase of informality in the employment sector has been assessed as a significant factor by 31% of respondents. The increase in irregular migration and the strengthening of the informal labor market as unemployed migrants in destination countries seek to work without authorization becomes a threat since in times of crisis opportunities for regular labor migration decrease.

Figure 7.7 — Which of the following impacts of the economic crisis have affected your family more?

Interestingly, social and health problems such as increase of stress and depression increase of divorce cases, difficulties in social relationship have been considered as other consequences of the crises, which also affect reduction of life quality.


Other consequences of the crisis, identified by this target group are: worse work conditions and relationships, increase of criminality and decrease of security, reduction of expenditures for children education, decrease of confidence in public institutions, and environmental degradation.

In addition, we have asked this target group to score several reasons affecting their decision to study or live abroad. The results are presented in Figure 7.8 and Figure 7.9.

Figure 7.8 — Which of the following factors affect more the decision of Albanian students to study abroad?

As in the case of the first target group, sensitive factors are the level of the country development and long term effects of economic crisis, scoring respectively 4.07 and 3.65, higher than in the first case.

Discussions, conclusions and recomandations

Emigration patterns in the past have had many macroeconomic effects on the economy. The main effects have been experienced especially:

■ on the Labor market – Since the average age of Albanian emigrants is relatively young, the consequences on the labor market, especially prior 2000, were the decrease of the rate of unemployment. Calculations by Gjipali (2003) show that in 1998 the potential rate of unemployment in the absence of migration would have been 44.25% rather than the real rate of 18% (Bank of Albania, 2011). It is obvious that migration has had positive effects on labor indicators in the past, but its impact in the next few years must be re-evaluated as many Albanians living in neighboring countries are considering returning home, thus affecting labor market in Albania. Since 2008, unemployment rate has increased by 1%. According to Bank of Albania (2011) the current trend is improving, but the possibility of return of Albanian emigrants, in absence of employment repatriation policies, might impose further pressures on employment indicators.


■ on inflows of remittances - Migration flows have contributed to the growing importance of remittances as a major source of income for many Albanian households and for the national economy. Officially, such transfers are estimated to have reached US$ 1 billion in 2005, constituting 14 percent of GDP (IMF, 2006). Remittances thus serve as the most important source of foreign exchange, almost twice as large as the value of exports, more than seven times the value of foreign aid and almost fivefold the amount of foreign direct investment in 2005 (Gjipali 2003 and Azzari, Carletto 2009). However remittances figures have drastically changed in the past few years. Gedeshi (2010) argues that the main factors responsible for the decline of remittances since 2007 have been the global economic crisis which has affected deeply Italy and Greece, and the general trend in remittances patterns. Such changes will have profound economic consequences. Comparing to the year 2007, when the level of remittances was 10.37%, during the years 2008, 2009, 2010 remittances declined respectively by 15.21%, 6.56% and 13.06% (BOA, 2011). In addition, Korovilas (2011) based on a survey conducted with an Albanian community in southern Greece, has studied the effect of the Greek sovereign debt crisis of 2010/2011 on the patterns of migration and remittances between Greece and Albania. In terms of the pattern of migration, the main findings of this study were the reduction of employment opportunities, which led to return of migrants, especially by married women and single men to Albania. In terms of remittances, the impact of the sovereign debt crisis has been the decrease of the remittances of active migrants (78% decrease in the number of remittance active migrants). These consequences have had direct implications for the ‘sustainability’ of the study community in terms of their future employment prospects and their ability to send remittances.

As this study has shown, effects of the crises affect the migration decision of Albania and thus future patterns of migration. Migration has had many economic consequences in Albania. Therefore identifying push and pull factors of migration is crucial for future macroeconomic and social stability.

Finally, flexible, coherent and comprehensive migration management policies from both origin and destination country are needed to maximize the benefits of migration, protect migrants and take their needs into account in measures addressing the crisis.


Figure 7.9 — Which of the following factors affects more the decision of Albanian students to stay abroad after finishing their studies?

4 ReferencesBank of Albania (2011), “Buletini i Bankës së Shqipërisë”.

Bank of Albania (2012), Statistical database, http://www.bankofalbania.org/

European Movement Albania (2010), “Policy Paper Brain Gain Policies and Their Impact on the European Integration Process of Albania”, Tirana, Albania.

European Movement Albania (2011), “Policy Paper: Is the return worth it? On the reintegration of high skilled returnees in Albania”, Tirana, Albania.

Gedeshi I. (2010). “Global Crisis and Migration: monitoring a key transmission channel to the Albanian economy”, Tirana: UNDP & IOM.

Gjipali A., (2003), “Emigration and its Economic Consequences; the Transition Phase of Albania”, Bamberg, Germany.

Hazard. A, Azzarri C., Calogero C., (2009), “Modeling Migration Dynamics in Albania”.

IMF (2006), “Albania Poverty Strategy Paper – Annual Progress Report”, Washington, DC.


IOM (2009), “The Impact of the Global Financial Crisis”, Policy paper.

King R., Vullnetari J., (2003), “Migration and Development in Albania”, Sussex Centre for Migration Research.

Korovilas J. (2011), “The Greek sovereign debt crisis of 2010/2011, impact on migration and remittances between Greece and Albania”.

Markova E. (2007), “Economic and Social Effects of Migration on Sending Countries: The cases of Albania and Bulgaria”.

Skeldon R., (2002), “Migration and Poverty”, Asia-Pacific Population Journal.

Vullnetari J., (2007), “Albanian Migration and Development: State of The Art Review”, IMISCOE Working Paper No. 18.

World Bank, (2003), “International Migration, Remittances and the Brain Drain: A Study of 24 Labor-Exporting Countries”, PRMPR World Bank.

RISK

OBJECTIVE

MA

NA

GE

Financing and investment opportunities in Southeastern Europe, before and after

crisis

Fjona Zeneli,* Ina Sokoli**

*University “Ismail Qemali” of Vlora@: [email protected], +355692984979

**University of Tirana@: [email protected], +3550693428637

AbstractSoutheastern Europe is now in a moment of change and provocation generated by

the new European context. In this new context, this region is a challenge for investors, and also an opportunity. We will primarily present, discuss and analyze data related to the Southeastern Europe region - Albania, Bosnia & Herzegovina, Croatia, Serbia, Macedonia, Kosovo, Montenegro, and Bulgaria and Romania (i.e., EU member states since 2007), also known as the countries of the Western Balkan region.

The whole material used is ensured by different World Investment Reports and regional surveys about Financial Statistics made during years.

Since all of these countries are to a great extent integrated within the global economy yet struggle with economic, administrative, social and political challenges, development and implementation of reforms there largely depends on their access to


foreign capital and the overall performance of their main trading partner and primary funding contributor -the European Union , this paper strives to provide an exhaustive survey of the type, scale, target and origin of investment activity in the region.

In this respect, this paper, tries to analyze investment and financing opportunities in this region, taking into account the general economic evolution of countries.

Key words: investment, opportunities, activity, management, trade

1 The Southeastern European region

1.1 Overview of the Southeastern European region

Southeastern Europe is a relatively new geopolitical denotation for the Balkan states, a region frequently regarded by Western countries as a heterogeneous set of countries with their own cultural specifics, dynamics, and an interconnected and complex modern history. The countries that form this part of Europe are Albania, Bosnia & Herzegovina, Bulgaria, Croatia, Kosovo, FYR Macedonia, Moldova, Montenegro, Romania and Serbia. Although diverse in nature and rich with differing histories, the Southeastern European countries have one thing in common - all have expressed a desire and immense willingness to become part of the European Union and thus benefit from one democratic European market with all countries having equal rights and favorable future prospects.

However, at the present, SEE countries differ substantially in their status of EU accession.

The EU accession itself is one of the key factors that influence the investment climate in the region. Cases in point for SEE are Bulgaria and Romania, which in the process of their EU accession managed to attract record levels of FDI to their economies. In this respect, it could be argued that with the advancement of the EU accession process, the investment climate in the rest of the Balkan countries would improve significantly. An equally important challenge for the region was how to attract investment.

1.2 Sectors of interest

To no one’s surprise, the real estate and construction sectors proved to be the most attractive, with strategic investors and investment funds allocating almost one-third of their capital in such projects, while SEE banks financed even more projects – more than half of all loans given to businesses were for real estate and construction projects. Another three sectors, namely financial intermediation, ICT and telecom, also proved to be highly attractive to foreign investors given the global

Fjona Zeneli,* Ina Sokoli** 81

trend toward digitalization and virtualization. Still other projects were undertaken in the manufacturing sector, transport and logistics, healthcare, energy and agriculture sectors. In the period 2004-2009, major privatization opportunities were the main driver for private capital inflows and strategic investments into the SEE region. Table 1 and Figure 1 below outline the gradual process of liberalization of Southeastern European countries’ economies and the corresponding privatization revenues of the SEE countries in the period 2004-2008.

Table 8.1 — Privatization revenues (cumulative, in per cent of GDP). Source: Transition report, 2009, EBRD.

Country 2004 2005 2006 2007 2008Albania 11,4 11,5 11,7 13,7 13,6Bosnia and Herzegovina 2,6 n/a n/a n/a n/aBulgaria 18,0 21,4 22,8 23,3 n/aCroatia 14,6 14,7 15,7 15,7 17,0Kosovo n/a n/a n/a n/a n/aMacedonia 13,8 14,3 20,0 20,2 20,6Montenegro n/a n/a n/a n/a n/aRomanua 9,2 9,5 9,8 9,9 10,0Serbia 7,7 10,2 17,4 20,2 21,4

Not surprisingly, the countries that proved to be the most attractive to foreign investors prior to the crisis were Romania and Bulgaria. Given their status of full EU members, their large populations (relative to the other SEE countries) and high levels of GDP per capital, these two countries attracted the bulk of investments to the region.

Figure 8.1 — Privatization revenues (cumulative, in per cent of GDP). Source: Transition report, 2009, EBRD.

Serbian and Croatia make up the second group of countries with a lower


number of investments, though still above the average of the region. The rest of the SEE countries, namely Albania, Bosnia and Herzegovina, Kosovo, Macedonia and Montenegro, were not able to attract many investment projects, mainly because of their small markets, small population, low levels of GDP per capital and the fact that they have a long way to go to become EU members.

Bulgaria and Romania have already completed the necessary reforms and have become members of the EU. Macedonia, Croatia and Turkey are officially recognized as candidate countries and as such they must implement the remaining necessary reforms in order to become member states. Albania, Bosnia and Herzegovina, Kosovo, Montenegro and Serbia are identified as potential candidates and need to focus more on restructuring in order to move on. Depending on the category, there are different types of financing available to the countries to assist them in the process of implementing EU standards.

2 Origins of financingConsidering the origin of the financing in the SEE region, the majority of

investment projects were financed with EU capital. Similar to the strategic investors in the region (most were EU-based), most of the capital of the investment funds was from within Europe, the same as for the Banks. The main reason is that the EU was and still is the main trading partner for the countries in the region.

2.1 Origin of financing of the strategic investors

With regards to the origin of the foreign investors who have undertaken investment projects in SEE, EU countries has the majority stake of the total strategic investments in the region (in Bosnia and Herzegovina it is around 90 percent). Austrian companies have been the major foreign investors in the most of the SEE countries. For example, over the past three to four years Austrian companies have been the biggest investors in Albania, Bosnia and Herzegovina, Kosovo, Serbia, and Romania and the second biggest investors in Bulgaria and Macedonia following foreign investors from the Netherlands. Besides Austrian and Dutch companies, other major investors to the countries in the region include companies from Norway, Germany, Italy, Greece, Slovenia, France, Luxembourg and Hungary.

Bosnia and Herzegovina, however, is an exception among the SEE countries. Although Austria tops the list of foreign investors, the other most active investors were from neighboring Serbia, Slovenia and Croatia, which is not common for the rest of the SEE countries. Another interesting fact is that US-based investors represent only a small fraction of all foreign investors. However, the actual rate of US investment is much higher given the fact that US companies invest primarily through their European affiliates.


The companies that have been most active in both Greenfield/Brownfield projects and in acquiring different types of assets in the region are some of the biggest blue-chip companies in the world, in the banking sector (i.e., insurance, financial intermediation), in the energy sector, in the telecom industry, in the retail industry, and in the consumer goods sector.

2.2 Origin of financing of the Investment funds

With regard to the origin of capital that has been used to finance investment projects in the SEE countries, we can differentiate between three groups of investment funds:

1. Multinational (i.e., the capital is from the US, Europe, Asia, etc.,),

2. European (i.e., the capital comes from individuals, corporations and institutions within Europe),

3. Southeastern European (the capital comes from the SEE region). Based on the finding of this research, the origin of the investment funds’ capital is as follows: a. 41 funds with multinational capital – the investors were both private

and public institutions form US, Europe, Asia, etc. ,b. 23 funds with European capital – the investors were both private and

public institutions from European countries ,c. 14 funds with Southeastern European capital – the investors were both

private and public institutions from within the SEE region ,

2.3 Origin of financing of the Banks

Almost all the commercial banks in the Southeastern European countries are privately owned, most of them belonging to banking groups based outside the region. Austrian, Italian and French banks are the biggest players in the SEE banking sector. Banking groups from Hungary and Greece also entered the region’s unsaturated financial market and quickly expanded their networks in 2006 and 2007. Non-SEE banks controlled the banking sector of most SEE countries in 2008.

Given the fact that strategic investments and financial projects by investment funds comprise the bulk of foreign direct investments to a country, this report will consider the volume of FDI as representative of the volume of those two types of financing. It is worth mentioning here that FDI to a country also includes some types of credit lending and reinvested capital from business corporations. In the years prior to the crisis, the Southeastern European countries experienced a boom in their domestic economies, mainly fueled by large inflows of FDI. For instance, in 2006 in Romania inward FDI amounted to USD 11.394 billion, while in 2007 and 2008 it was USD 9.923


billion and USD 13.305 billion respectively. In 2006, Bulgaria attracted USD 5,172 million as FDI, in 2007 – USD 11.716 billion, and in 2008 – 9.205 USD billion. These figures show that FDI growth for the two countries prior to the crisis was more than 50 percent year on year, and would have been more if not for the negative effects of the crisis. Another set of countries, namely Croatia and Serbia, attracted a relatively large amount of FDI, though not as much as Bulgaria and Romania. One of the primary reasons is that those countries are still in a process of becoming EU members and thus have not become part of the large EU market.

Although the remaining countries from the region – i.e., Albania, Bosnia and Herzegovina, Macedonia and Montenegro saw a record number of investment projects by foreign investors between 2006 and 2008, they attracted the least amount of FDI of all the SEE countries. The FDI for those countries were mainly targeted at the privatization of state-owned enterprises. The foreign investment varied ranged between USD 400 million to USD 1 billion, with the exception of Bosnia and Herzegovina in 2007 – USD 2.197 billion. The years prior to the financial crisis can be characterized by rapid credit lending growth by commercial banks. In the end of 2009 in almost all SEE countries credit lending stopped, which inevitably reflected on the on the volumes of credits lent to the private sector. The only exception was Croatia with a mild credit lending growth of around 3-5 per cent in November 2009.

2.4 EU Funding

Evolving from a small core of European countries, the EU today is a dynamic political and economic union of 27 European states, based on a single market allowing for the free flow of capital, goods and people. The enlargement process requires candidate countries to implement certain political, economic and legal reforms in order to harmonize with EU standards. With the accession of Bulgaria and Romania in 2007, it has become clear that the EU will continue its enlargement with the countries of Eastern Europe.

In the light of the major changes in political regimes in the 1990s, the countries of the SEE region have seen the accession into the EU as a viable option for their future development given the much bigger market and business opportunities. The eruption of hostilities in the Western Balkans over the collapse of Yugoslavia was a major setback for the region. Depending on the political, economic, legal and social development on one hand and the level of progress of accession negotiations with the EU on the other, a few clear categories of countries could be highlighted.

Bulgaria and Romania have already completed the necessary reforms and have become members of the EU. Macedonia, Croatia and Turkey are officially recognized as candidate countries and as such they must implement the remaining necessary reforms in order to become member states. Albania, Bosnia and Herzegovina, Kosovo, Montenegro and Serbia are identified as potential candidates and need to focus more on restructuring in order to move on. Depending on the category, there are different types of financing available to the countries to assist them in the process of implementing EU standards.


2.5 EU funding – past and present financial instruments. EU funding for the Western Balkan countries

As a core factor in the EU’s Enlargement Policy, the countries of the SEE region are subject to close monitoring and substantial assistance from Brussels. Although different in size, culture and economic standing, Albania, Serbia, Macedonia, Montenegro, Kosovo, Bosnia & Herzegovina and Croatia share similarities in issue areas and priorities to be addressed. Hence, these countries are regarded, by the EU, as constituents of a politically fragmented, but virtually unified economic and political landscape – namely the region of the Western Balkans. These countries qualify for structural aid and assistance from a number of EU foreign policy instruments, with the fundamental purpose of tying these countries closer to EU legislation, the European economy and values and successfully integrating them within the EU’s Single Market.

3 Factors of attraction/motivators

3.1 EU membership

The status of EU accession of the SEE countries has always been considered as a competitive advantage and a positive factor, influencing the flow of foreign investments by both strategic investors and investment funds. In the beginning of 2007, Bulgaria and Romania became full members of the EU and for the past two years have benefitted the most from inward FDI. For them, EU membership means access to a much bigger market, unrestricted capital flow and no tariffs and duties for exported goods and services. All this has motivated foreign investors (i.e., mainly from the Netherlands, Austria and Belgium) to initiate big investment projects either to serve the two countries’ market or simply to outsource production lines there.

At present the rest of the SEE countries are at a different stage in their EU accession. On the one hand, Croatia and Macedonia have been officially accepted as EU candidates and are expected to become full members in the beginning of 2014. As a consequence, they are now benefiting from EU financial aid to develop local infrastructure and administration. Once they are accepted into the EU, they are expected to attract more foreign investments into their economies. On the other hand, Albania, Bosnia and Herzegovina, Kosovo and Serbia still have a lot to do in order to eventually become EU members. Nevertheless, it is expected that in the future, as they move toward EU accession and membership, those countries will attract more investors and investment projects.


3.2 Market size

The market size of a country is an important factor to foreign investors when considering investment projects abroad, for the simple reason that countries with bigger markets and thus bigger market potential are able to provide more opportunities to multinational companies and foreign investors for their products and services.

Compared to the rest of the world, the SEE region represents a small fraction and thus a small share of the global market. However, looked at on the country level within the region, Romania, Bulgaria and Croatia stand out as the countries with the biggest market sizes, which was an important factor for attracting foreign investments before the crisis. Romania, with its population of over 20 million, is the most attractive to foreign investors, followed by Bulgaria with its 7.6 million population.

This indicates that like in the period prior to the crisis, when foreign investors were lured by the countries’ market sizes, in the forthcoming years we can expect this trend to continue. Once the world economy has gone back to its normal path, foreign investments will first go to the countries with the biggest market size (Romania, Bulgaria and Croatia) and to a lesser extent to Bosnia and Herzegovina, Macedonia, and Albania.

3.3 Location and geographical characteristics

SEE countries are strategically situated as a connecting point between Europe and Asia, while also offering access to Russia and Africa. In the context of globalization and world markets’ specialization in providing goods and services, this becomes a vital consideration for any investment initiative. The geographical features of the countries in the SEE region have proved to be an important factor of attraction to foreign investments. The SEE countries’ natural resources are another factor that has acted as a magnet for foreign investments for several sectors in the region (e.g., mining, renewable energy and agriculture). The Southeastern European countries vary in terms of their mineral deposits, oil and gas reserves, water resources, forests and arable land.

Table 8.2 — GDP per capita (USD) in the SEE countries. Source: Countries’ national banks.

Country 2008 2009Albania 4,073 3,824Bosnia and Herzegovina 4,625 4,278Bulgaria 6,856 6,223Croatia 15,628 14,242Kosovo n/a n/aMacedonia 4,656 4,482Montenegro 6,509 n/aRomanua 9,291 7,542Serbia 6,781 5808


3.4 Macroeconomic stability

Macroeconomic stability as a factor is important to foreign investors when deciding whether to undertake investment projects or not. Although frequently regarded as a single figure, it is comprised of several components, namely the level of inflation in the country, the level of interest rates, the levels of GDP per capital, the amount government debt and whether the country has a surplus or a deficit. It is worth mentioning that this factor applies with equal weight to investment projects in all the sectors of a national economy.

In the period prior to the crisis, the macroeconomic stability of several of the SEE countries contributed substantially to attracting foreign investments. Since 2005, foreign investors have been willing to invest in Bulgaria, Romania and Croatia due to their stable domestic economies with rising levels of GDP per capita, affordable interest rates and relatively low inflation rates. According to their national banks, these three countries had the highest levels of GDP per capital in the region.

3.5 Taxes

Although the SEE countries varied in terms of their tax systems in the period prior to the financial crisis, they were in general more favorable to foreign investments than the rest of the countries in Europe.

Personal Taxes: With regard to personal income tax, the countries in the Southeastern European Region can be divided into two sub-groups: (i) countries with a flat income tax (Romania, Montenegro, Moldova, Macedonia, Kosovo, Bulgaria, Bosnia and Herzegovina, and Albania), and (ii) countries with variable tax (Serbia and Croatia).

Corporate Tax: Just as SEE countries can be split into two groups according to their personal income tax systems, they can also be grouped into two subgroups depending on their corporate tax rates: (i) countries with low corporate taxes , and (ii) countries with high corporate taxes.

The first group includes Montenegro with only 9%, followed by Albania, Bosnia and Herzegovina, Bulgaria, Macedonia and Serbia with a corporate tax rate of 10%, while the second group is made up of Romania with a 16% corporate tax, followed by Croatia and Kosovo with 20%.

3.6 Seaport Facilities

In terms of maritime logistics and seaport facilities, the countries of the Western Balkans, except for Serbia, Macedonia and Kosovo, have access to the Adriatic Sea and maintain an adequate water transportation infrastructure. Albania occupies an important strategic location in the Balkans along the Strait of Otranto, which


links the Adriatic Sea to the Ionian and Mediterranean Seas. The country has four main seaports: Durres, Vlore, Sarande, and Shengjin, making it an important sea-hub in economic relations between the EU, Africa and Asia. Croatia’s six seaports make it the most preferred country for maritime transport from Asia, Australia and Oceania through the Suez Canal to Europe. Montenegro is situated in the central Mediterranean area, on the coast of the Adriatic Sea. The country has three seaports – Bar, Kotor and Zelenika; however, only Bor has the capacity to handle industrial cargo on a larger scale.

Bosnia has the right of passage to the outer sea via its only port: Neum. The main freight port for Bosnia today is Ploče (in Croatia), which lies further north and is connected to Bosnia via a railroad. Bulgaria and Romania have access to the Black Sea and the Danube, which significantly contributes to their overall import-export potential and logistic connectivity between Asia and Europe. Bulgaria has two major cargo ports at the Black Sea – Varna and Burgas – while the major ports in Romania are Constanta (the largest Black Sea port), Mangalia and Sulina. Macedonia, Kosovo and Serbia are landlocked countries with no sea access. However, they are important to cross-regional transportation. Macedonia is especially crucial in this respect, being situated centrally on all international transport corridors.

Figure 8.2 — Gross average wage per month (in EUR). Source: Central banks publications.

3.7 Low labor costs

The cost of labor in 2009 remained relatively inexpensive in the countries of the region, compared to labor markets in Western and Central Europe. The average monthly salary in Bulgaria and Romania, both EU member states, amounts to 310-350 euro; the figures for Serbia and Macedonia are similar. Average remuneration is slightly higher in Bosnia and Montenegro at around 450 euro, with a peak registered in Croatia at 731 EUR. By comparison, the average monthly salary in Central European countries is significantly higher – around 879 EUR in Poland and 923 EUR in the Czech Republic.


4 Why Southeastern Europe, why Albania? (The most attractive domains for investments)

4.1 Tourism

The tourism, represent one of the most attractive sector in Southeastern Europe. This domain is very attractive in:

■ Bosnia and Herzegovina (geographic position, fascinating natural beauties variety of attractions);

■ Greece (according to Word Tourism Organizations, Greece ranks among the top 15 tourism destination);

■ Macedonia (summer and winter tourism, eco-tourism and cultural tourism),

■ Moldova (rural tourism, national tour, wine path tour, business tourism—the favorable geographic location);

■ Montenegro (tourism is a strategic sector for the country’s economic development)

■ Romania (rural tourism, variety of attractions, eco-tourism and cultural tourism);

■ Serbia (the tourism industry directly employs around 8% of the active population of Serbia);

■ Turkey (is one of the most popular destination in Mediterranean region and its performance in terms of tourism revenues is substantially above the world average).

4.2 Agriculture and Food proceeding ■ Albania (is rich in herb and spices. About 30% of the European medicinal

flora is found in Albania); ■ Bosnia and Herzegovina (there are over 1.5 million hectares of

agricultural land in B&H, divided between crop growing and livestock breeding);

■ Macedonia (the agribusiness sector is of great significance for the economy, accounting for 15% of GDP);

■ Montenegro (represents one of the territories in Europe where to a large extend nature has been preserved);

■ Serbia (fruits, vegetables and organic products).


4.3 Business services sector ■ Albania (the Albanian business services sector is a distinct feature in the

country’s economic live); ■ Bulgaria (is in the list of leading outsourcing destination for technical

support and shared services among countries in Eastern Europe); ■ Croatia (with its highly developed telecommunication infrastructure,

stable and transparent fiscal and legal environment, highly educated and multilingual workforce).

4.4 Conclusions

1. The Southeastern Europe represents an attractive zone for investment, in different activities sectors, with a great potential of development.

2. With EU countries being the main export trading partner for all of the Southeastern Europe countries (e.g., over 50% of the exports of all countries are EU related), it is expected that investment interest in the region, especially in the segment of strategic investment, will come mainly from EU based entities.

3. In this respect, it will be easier and more cost effective for European companies to expand their operations networks to countries with lower transition costs, but uniform EU administrative and legal framework. For a progress in figures in Albania will not necessarily translate into a sizeable advantage of investment conditions there, in so far levels of workforce sophistication and functioning market and rule of law institutions are still low and reforms take place slowly.

4. Sizeable and adequate assistance from international entities, such as the EU, IMF, the World Bank and other IFIs, including EBRD, EIB and CEB has also contributed to a large extend for the preservation of confidence in the region and for lowering risk perceptions.

5. As a general conclusion from all foreseen and undertaken counter crisis measures in the region, however, it is clear, that due to the relatively small size of the economies and their general dependence on outbound markets, it is not only from within that changes will come.

6. Countries as Albania, Kosovo, Bosnia & Herzegovina and Montenegro are currently subject to intensive funding by both the EU and IFIs with the general aim to enhance necessary reforms in administration, fiscal policies and labor market efficiency and pave the road for EU membership and FDI.

7. However, lacking infrastructure in energy and water supply in Albania


are a general concern for investment and general economic development, although performing well in current crisis conditions, these countries have a long way to go before being able to turn into a sound investment hotspot.

5 ReferencesBank of Albania. 2009. Time Series Database of the Bank of Albania. July 30.

Economist Intelligence Unit (EIU). 2009. Country Profile: Albania. EIU. European Commission. 2009. “Albania—EU-Albania Relations.” European Commission. July 30, 3009.

European Union Commission. March 17, 2009. Procedures Relating to the Implementation of the Common Commercial.

Policy. Official Journal of the European Union, 2009/C 62/07.

European Free Trade Association (EFTA). June 29, 2009. “EFTA and Albania finalized free trade negotiations.” EFTA. July 27, 2009.

International Monetary Fund (IMF). August 2009. International Financial Statistics.

World Trade Organization (WTO). 2008. Turkey-Albania. July 27, 2009. Southeastern Europe Investment Guide, Bulgarian Economic Forum, Sofia, 2006.

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Solutions for financing public deficit of Albania

Evis Gjebrea,* Patris Poshnjari,** Ermela Kripa***

Economic Faculty-European University of Tirana*PhD Candidate, Phone: + 068 60 31 557; @: [email protected]

**PhD Candidate, Phone: + 068 90 19 434; @: [email protected]***PhD Candidate, Phone: + 068 60 31 463; @: [email protected]

AbstractInternational Organizations such as World Bank and IMF, have continuously

signalized developing countries for risks posed by huge amount of public debt, including Albania. Based on official statistics Albania records a public debt near the so called Upper Limit, which is 60 % of GDP.

After the fall of communism in the 1990s, the CEE countries followed a long and difficult road of reforms and adjustments. Likewise, the Albanian economy experienced many structural and economic policies to support democratic development and market economy. The need for social, political and economic development is one of the reasons that explain high amounts of public debt over the years. This debt has been used primarily to finance public deficit and development projects, which generate low rate of returns.

The literature on Public Finance suggests different ways of financing public debt, but in this article our focus is on method of financing public deficit through public debt. Aim of this article is to find out whether there is any optimal structure of


public debt composition (domestic and foreign) to finance deficit. Our methodology includes an evaluation of risk derived from domestic and foreign debt and relies on the experience of other countries that have been successful in managing public debt with the final aim of adopting best model to the Albanian case.

Keywords: Public Deficit, Public Debt Structure, Risk Evaluation

1 Literature review on public debtThe development of public debt and budget deficit has become a crucial policy

problem in most industrialized and developing countries. In this regard it is of foremost importance to set a legal target restriction for state borrowing, which should be in compliance with macroeconomic parameters. This necessity is related also to the impact of state borrowing on the economy as a whole. The aim of the following section is to present from the theoretical point of view the effects of public debt compared to financing budget deficit through taxes. In economic literature there are different views to the positive and negative effects of public debt on the economy.

Based on the Ricardian equivalence theory, which was first developed by Ricardo and later reviewed by Barro (1974), the main concept mentioned was debt neutrality. According to this concept there is no real effect on aggregate demand weather financing budget deficit by debt or taxes, because consumption is reduced either way. Buchanan criticized Barro for ignoring the effect of negative capital formation that comes with that. Buchanan (1958) also believes that there must be some shifting of the primary real burden to future generations. Buchanan and Wagner (1977) developed the idea of fiscal illusion through which public in wide does not acknowledges the burden caused by public debt as compared to tax financing1. Meanwhile the Ricardian equivalence theory does not take into consideration fiscal illusion.

The neoclassical theory pinpoints the link between high public debt and the crowding out of the private sector, which impacts the interest rate increase due to high demand for debt by the Government. The crowding out and interest rate increase have a negative impact on the future GDP. Therefore, the intergenerational distribution is unequal because future generations faced with lower GDP and higher interest rate bear higher costs as a result. Despite the high burden through public debt the distribution theory justifies it through the fact that future generations accumulates technical knowledge as well as inherit productivity effects of public investments. In this point of view there still exists intergenerational equity, which can be provided by the so called “golden rule”. It means that the upper level of public debt should be inasmuch as its net public investments.

The empirical studies that confirm the positive correlation between public debt and interest rate are made by Elmendorf 1993, Dai and Philippon 2006, Cebula 2000, Gale and Orszag 2003, Bernoth et al 2003, Codogno et al 2003, Afonso and Strauch 2003.

1 Tempelman. J (2007), p. 435-449

Evis Gjebrea,* Patris Poshnjari,** Ermela Kripa*** 95

Another view is the allocation theory which justifies public debt in two ways: (i) tax smoothing and (ii) addressed economic problems.

The political-economic theory advocates the strategic deficit theory, which aims to attract voters for securing next electoral victory, or can be used by governments to constraint spending decisions of possible successors2.

Even though some of the mentioned theories are in support of public debt there is a need for setting a public debt limit in order to protect taxpayers and voters and avoid public probable risks.

In the next chapters we will focus on public debt problems and possibility of finding a fiscal rule in the case of Albania.

2 Description of public debt and its trend in Albania and the region

After the fall of iron curtain almost all CEE countries were characterized by high public debt due to the need to restructure their economies. The main sources of financing the recovery of economies were mainly through privatizations of state own enterprises and public debt. The foreign debt was provided through international organizations such as World Bank, EBRD, EIB, KfW, IDB, IMF etc, which offered credits under concessional terms. Domestic public debt is not a new phenomenon for developing countries. Usually these countries have higher levels of domestic debt over external debt due to inability to access international capital markets. Therefore, in a need to find financing sources to cover budget deficit, they issue Treasury bills, bonds and the like.

This section focuses on Albanian public debt trend and its influencing factors. In the following graph is shown a tendency of net public debt of Albania and CEE countries for the period 1995-2012.

As the graph shows Albania after Hungary has the highest level of public debt, which has been a continuous subject of criticism by IMF calling for prudent public finance consolidation. Exception is made for Kosovo which has low level of public debt of due to the formation of Kosovo as a new country in 2008 meaning that Serbia is responsible for past public debt burden.

The highest public debt for Albania was registered in 1997 due to collapse of pyramid schemes. After this year the public debt though high started to decrease and was maintained according to the recommendations of IMF, but it never fell below the Emerging Market Countries level. Between 2003 and 2007 the public debt in combination with strong GDP growth declined from 60.7 % to 53.8% of GDP. This trend reversed starting with 2008 when the public debt was 55.01% of GDP due to the increase of public investments. That

2 Sachverstaendigenrat (2007), p. 35-41


is the reason that in 2008 and 2009 the fiscal deficit increased from 5.6% to 7% of GDP due to the need to alleviate the consequences of global crisis.

20

40

60

80

100

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Albania Bosnia and HerzegovinaCroatia HungaryFormer Yugoslav Republic of Macedonia MontenegroSerbia

Figure 9.1 — Net Public debt in % of GDP for Albania and the region. Source: Ministry of Finance, own graph.

The current public debt amounts to 59.4 % of GDP, which is slightly lower than the Maastricht target of 60% of GDP. Also the higher deficit reflects government spending for key infrastructure, education and health.

A study of IMF (2003) finds out that by the increase of public debt the primary balance weakens and stops when the debt reaches the level of 50% of GDP. This points to the conclusion that on average the fiscal policy in the EMC countries ceases to be consistent with debt sustainability once the debt to GDP ratio reaches 50% of GDP3. Therefore, this can explain the target of the Albanian Government to lower debt ratio to nearly 50% of GDP until 2015. In the following sections we present a more thoroughly analysis of public debt structure as well as ways of reducing.

3 Importance of an optimal public debt composition (trade offs)

In order to measure the country’s exposure to sovereign risk it is important to take into consideration the size of public debt as well its structure. A high public debt associated with higher interest rate narrows the budget space to act in favor of other expenditure items. Therefore, the focus of this section is to analyze the public debt structure of Albania in order to identify problems and to find a fiscal rule in that it minimizes risks and improves public debt structure.

We will begin our analysis by decomposing public debt structure according to its

3 IMF, 2003, p. 9-10


main components and more concretely: (i) countries dependence from external debt (ii) average maturity duration (iii) type of interest rate- variable or fix (iv) indexed public debt to inflation. All these components form the indicator of public debt structure.

Public Debt and Deficit as % of GDP

OVERALL DEFICIT

Total Public Debt

Domestic

Foreign

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

1996 1998 2000 2002 2004 2006 2008 2010

Figure 9.2 — The public debt structure of Albania. Source: Ministry of Finance, own graph.

As seen from the Figure 2 the external debt had the following trend: it increased until 2002 reaching 21% of GDP, started to decrease until 2007 reaching 12.4% of GDP and from 2007 to 2011 it increased to 22.5 % of GDP. Speaking in terms of Albania’s dependence from external debt it can be concluded that ratio domestic debt over foreign debt is 60:40. The target set by the Ministry of Finance is to bring this ratio to 55:45.

Albania has been shifted from low income country to middle income country and as a result has been given country rating giving a positive signal to investors and financial markets about the economic prospects of the country. This will facilitate foreign borrowing of Albania.

Although domestic debt might seem more attractive to the Government the choice between domestic and foreign borrowing is based on four important factors:

■ Crowding out effect meaning that in the short term domestic borrowing leads to higher domestic interest rates. In the short term foreign borrowing tends to avoid this crowding out effect

■ Political choices ■ Debt service costs ■ Balance sheet effect

Government debt consists of central government debt and local government debt. The last are allowed to borrow after approval from the MoF. Central government guarantees are issued to State Owned Enterprises. Part of the debt being guaranteed is


serviced by the central government. However, overall the guarantees are not a major part of central government obligations. Compared with Albania, Former Republic of Macedonia has higher guarantee level, especially for public enterprises meaning that greater negative consequences over the budget. Therefore the future policy of Macedonia aims to reach a sustainable level of 10% of GDP.4

Domestic debt is mainly short term, consisting of T Bills covering 60% of the total domestic debt and 40% are long term. As we can see the composition of domestic debt is short because of slow development of capital market for trading Government long term instruments. The bonds being issued mostly consist of 2 year bonds. Starting from 2007 part of the debt portfolio are the 7 year bonds the Government issues, but in 2009 they have not been issued due to lack of liquidity and market problems. Although this trend, by the end of 2009 there is an increase of the long term domestic debt especially for 5 year bonds.

Table 9.1 — Duration and average maturity in selected countries. Source: OECD Central Government Debt Statistical Yearbook 1999-2008 and Ministry of Finance Albania.

Country Debt Duration (year) Average maturity (year)

Albaniadomestic debt 0,8 0,8external debt 6,8 11,4total debt 3,0 4,6

Countries in the region and new EU countriesCzech Republic 4.1 6.6

Greecedomestic debt 5,3total debt 8,4

Hungary 3.0 4.8Italy 4.5 6.8Poland 3.6 5.3Slovakia 3.1 4.7

Turkeydomestoc debt 0,7 2,0external debt 7,9

As seen from table 1 the duration of domestic debt is 0.8 year, while the external debt has a longer average maturity approximately of 11.4 years. This is due to the high external debt registered until 2005 from international organizations through concessional loans with long term maturity. Since Albania has shifted from borrowing under concessional terms to commercial terms the average maturity of external debt decreased from 11.4 to 6.8 years.

The interest rate structure of public debt is characterized by fixed and variables interest rates. What is evident is that in the first decade fixed interest rates dominate over variables ones due to the concessional loans. Whereas after 2000 due to borrowing

4 Ministry of Finance of the Republic of Macedonia, 2010, p.11.


under commercial terms there is an increase of the variable interest rates, therefore part of external debt contracted under variable interest rates has been increasing. The 5 year bonds consists of both fixed and floating rate bonds, the latter having the interest rate linked to the one year T Bill rate.

Since most of the public debt is short term, domestic debt being exposed to interest rate changes and external debt to exchange rate, debt risks are increasing which might lead to significant fluctuations of debt service. The following charts show respectively an external debt service trend expressed as percentage of exports of goods, service and income and as percentage of GNI.

Figure 9.3 — Left: Interest payment on external debt. Right: Interest payment on external debt (% of exports of goods and services and income)(% of GNI). Source: World

Bank, Global Development Finance

Besides the average maturity and interest rate another important factor to be taken into consideration is government instruments indexed to inflation. This option is usually offered in developed countries, for example in England about 20% of its public debt is indexed to inflation. In developing countries there is less effort to index public debt. In Albania public debt is not indexed to inflation, but inflation rate is kept under control and is within the objectives set by the Bank of Albania (2%-4%).

In summary, by looking at the public debt structure we conclude that there is a need to improve its structure in order to alleviate possible risks. In deciding the optimal structure of public debt it is important to consider the trade offs between refinancing risk and exchange rate risk. Based on the Debt Management Strategy for 2011-2014 this structure will be improved through three main objectives:

■ The ratio domestic/external debt reduced to 55% / 45%. ■ New borrowing in domestic market should be made only through long

term instruments and external borrowing if possible be made in Euro denominated currency.

■ Duration of the domestic debt should be increased to 1.29 year.


Macedonia stresses the importance of an optimum currency structure In order to reduce exchange rate risk and interest rate risk. Accordingly one of the mid term objectives for debt management is that the share of Euro denominated debt in total public debt should not be lower that 70%5. This option could be also valid for Albania.

4 Solutions for public debt reductionAim of this section is to introduce ways for reducing public debt and analyzing

factors for reaching sustainable level of public debt. Public debt level is considered sustainable if it enables timely servicing and refinancing on the long run. On a broader view it depends on economic growth rate, inflation rate and development of domestic financial markets.

There are many factors that impact the sustainable level of public debt in EMC countries (IMF, 2003; Rogoff et al., 2003):

■ Revenue ratio, which makes possible to service public debt ■ Lower revenue volatility, which reflects the macroeconomic volatility.

For Albania the coefficient of variation which measures the volatility of revenue to GDP ratio was 6.7 for 1996-2008 while after 2008 this coefficient decreased to less than 1 showing an improved macroeconomic situation.

■ Low interest costs which in EMC countries account for 17% of total expenditures and 5% of GDP. In Albania these costs are lower at about 10% of total expenditures and 3% of GDP due to the concessional loans provided by international organizations.

■ Sensitivity of public debt to GDP to changes in the exchange rate. For countries that have high foreign currency denominated debt, depreciation of local currency could lead to high level of expenditures. In Albania the share of foreign currency denominated debt in total public debt has decreased from 50% of total debt to 30 % of total debt.

The solutions for reducing public debt made up to now include those taken at international and national level. At international level for example these solutions are stipulated in the Maastricht Agreement and Stability and Growth Pact according to which total public debt should be not higher than 60% of a country’s GDP.

At the national level we can mention the experience of Germany and Switzerland. In Germany the public debt regulation is based on Article 115 of the Constitution. According to this regulation the net borrowing by Federation shouldn’t exceed investment expenditures (Diekmann Berend, 1998)6.

5 Ministry of Finance of the Republic of Macedonia, 2010, p.15f.6 Diekmann, B. (1998), p 667-675.


In Switzerland the public debt regulation called “Swiss debt brake” (see the following graphic) model was implemented for the first time in 2003. This model is distinguished for 4 main characteristics which are the following7:

■ Simple expenditure rule with binding clauses ■ Consideration of exceptional circumstances ■ Introduction of stabilization account ■ Stipulations for the use of extraordinary revenue.

The mechanism of this fiscal rule is based on financing expenditures through current revenues instead of new debt.

Figure 9.4 — Debt brake rule. Source: Geier, A (2011), p. 14

In the case of Albania, it is difficult to come to conclusion of applying these solutions because positive effects in these countries are yet unknown since their implementation started in the last decade.

On the other hand IMF (2010) introduces 2 options for fiscal rule. The first one, called debt rule mentions that the nominal public debt ratio can increase less than the nominal GDP ratio increase. This rule is more flexible in deciding how to achieve the primary balance consistent with debt target. This could be done through decreasing expenditures or increasing revenues. The second option called expenditure rule mentions that expenditure ratio can increase equal to GDP growth rate increase. This option is more constraint because it does not take into account the revenue collection.

The expenditure rule seems to be not a good option for Albania considering its need to increase public investments. Therefore, the most feasible option seem to be the debt rule because there is room to strengthen revenue collection using its potential the country has for economic growth, improvement of tax administration and reduction of informal economy.

In order to guarantee a sustainable economic growth there is a need to identify

7 Geier, A. (2011), p 7-31, see also Brandner, P at al (2005), p.1-21.


new sources of growth. So far many sources with an impact to economic growth seem to have been fully exploited such as privatizations, self-employment in agriculture, foreign aid from international organizations, discharge of labor market due to massive immigration, high level of remittances etc.

Therefore, there is a need for a new economic model regarding new potential sources of economic growth such as: knowledge economy, introduction of new technology in all sectors of economy, policies oriented towards manufacturing, industrial, agriculture, energy and tourism. Once again this new economic model stresses the idea presented above about the debt rule solution because this model contributes to revenue increase.

It is recommended that Albania focuses its efforts to processing and diversifying of its products due to increasing demands and global market expansions, as well as modernize services that have positive effects in domestic employment.

5 ConclusionsAlbania in comparison with the countries in the region has high level of public

debt due to the need of public investments. Considering the risks associated with public debt such as exchange rate, interest rate a high public debt could mean higher exposure to its ability of repayment. Although Albania has made progress towards public debt management there is still a need to find a fiscal rule that would reduce public debt and contribute to its sustainability.

The most feasible option seem to be the debt rule because there is room to strengthen revenue collection using the potentials the country has for economic growth, improvement of tax administration and reduction of informal economy. Therefore, there is a need for a new economic model regarding new potential sources such as: knowledge economy, introduction of new technology in all sectors of economy, policies oriented towards manufacturing, industrial, agriculture, energy and tourism.

6 BibliographyAfonso A, Strauch R. Fiscal Policy events and interest rates swap spreads: evidence from

the EU, Working Paper. 2004; 303.

Barro R. Are government bonds net wealth?. Journal of Political Economy 82, December 1974; 6: 1095-1117.

Bernoth K, Von Hagen J, Schuknecht L. The determinants of the yield differential in the EU Government bond market. 2003.

Brandner P at al. The Swiss debt brake: an implementation proposal for Austria. Working Paper. Vienna. 2005; 1-21.


Buchanan J, Wagner.R.E. Democracy in deficit.1977; 8.

Buchanan J. Public principles of public debt: a defense and restatement.1958.

Cebula R.J. Budget deficits and interest rates in Germany. International advances in economic research. 2003.

Codogno L, Favero C, Missale A. Yield spreads on EMU Government bonds, Economic Policy. 2003;18: 503-532.

Dai Q, Philippon T. Fiscal policy and the term structure of interest rates. 2006.

Diekmann B. Die Budgetregeln des Artikels 115 GG. Wirtschaftsdienst. 1998; 78: 667-675.

Elemendorf D.W. Actual budget deficit expectations and interest rates. Harvard Institute of Economic Research. 1993.

Gale W, Orszag P. The economic effects of long term fiscal discipline. Discussion Paper. 2003; 8.

Geier A. The debt brake-the Swiss fiscal rule at the Federal level. Working Paper. 2011; 15.

International Monetary Fund. World Economic Outlook. Washington, D.C.2003.

Jonas J. Fiscal objectives in the post IMF Program World: the case of Albania, Working Paper. 2010; 10/77.

Ministry of Finance of Macedonia. Public Debt Management Strategy for 2010-2012. Skopje 2010.

OECD. Central Government Debt Statistical Yearbook 1999-2008. 2010.

Sachverstaendigenrat. Staatsverschuldung wirksam bewirken.Wiesbaden, 2007.

Tempelman J, Buchanan J. On Public-Debt Finance. The independent review 11, Winter 2007; 3.

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Risks in large scale projects management: Case of industrial parks development in

Albania

Arbina Sotoni,* Arjan Qefalia,** Ezmolda Barolli***

Lecturer & Researcher, Faculty of Economy, Tirana University, Albania*Dr. , @: [email protected]

**Doc. Dr., @: [email protected]*** Dr., @: [email protected]

AbstractRisks and uncertainties are present in all projects, particularly in large and

complex projects. Risks can have a strong influence on all phases of projects including feasibility study, design, planning, construction and even marketing and operation phase.

This paper focuses mainly on the particular risks that associate large scale projects, which usually involve immense capital investment, long term government commitment and long construction and operational periods. Large scale projects are complex in term of political, legal, technical, design and organizational aspects, which make them more uncertain and difficult to control compared to conventional projects. So, due to their particular nature and complexity, risk management is more important and significant in complex and large scale projects than conventional projects.


Through a vast literature review this paper aims to identify the most common risk factors associated with large scale projects and also, in order to investigate their realism, it analyses the case of development of Industrial Park projects in Albania, which undoubtedly fall under the category of large scale projects. Data collection is achieved through interviews with some of the major stakeholders in IP development. Taking into consideration the strategic importance of industrial estate development in Albania and the problems similar initiatives have faced in the past, impeding their implementation, the prior identification and management of the risks that can endanger the implementation of similar actual and future initiatives, becomes a necessity.

Key Words: Project Management, Risk Analysis, Industrial Park

JEL Classification: G32, M10

1 IntroductionAll projects are affected by risks and uncertainties, which can have a strong

influence on all phases of projects including feasibility study, design, planning, construction and even marketing and operation phase. Risk exposure may arise from the possibility of economic, financial or social loss or gain, physical damage or injury, or delay. It may also be caused by changes in the relationships between the parties involved in the supply, ownership, operation and maintenance of assets for public or private purposes. (Cooper et al., 2005).

Risk management processes are designed to assist planners and managers in identifying significant risks and developing measures to address them and their consequences. This leads to more effective and efficient decisions, greater certainty about outcomes and reduced risk exposure.

Sometimes organizations undertake projects which usually involve immense capital investment, long term government commitment and long construction and operational periods, that are considered large scale projects. Large scale projects are complex in term of political, legal, technical, design and organizational aspects, which make them more uncertain and uncontrollable compared to conventional projects. (Nazari and Beheshti, 2010)

Three aspects of large projects or programmes make risk management desirable (Cooper et al., 2005):

■ Their size implies there may be large potential losses unless they are managed carefully, and conversely large potential gains if risks are managed well.

■ They often involve unbalanced cash flows, requiring large initial investments before meaningful returns are obtained. In these circumstances, and particularly for assets with potentially long lives,

Arbina Sotoni,* Arjan Qefalia,** Ezmolda Barolli*** 107

there may be significant uncertainty about future cash flows, due to changing economic conditions, advances in technology, changing patterns of demand for products or services, new competition, or varying operating requirements. For projects with significant social or environmental implications, the benefits may not all be readily measurable in cash terms and social values may change during the life of an asset. Factors like these must be assessed and managed to ensure the capital investment is worthwhile.

■ Large public sector projects may involve a degree of private sector participation, either in the form of direct private sector investment or involvement in the through-life operations of a government-owned asset. This may require an additional focus on risk, particularly to identify and manage any residual risks for Government.

So, in other words, due to their particular nature and complexity, risk management is more important and significant in complex and large scale projects than conventional projects. Some authors go even further, considering that “large scale project management IS risk management” (Charette, 1996).

This paper aims to identify the most common risk factors associated with large scale projects with a particular focus on estate development projects. The case of Industrial Estate development projects in Albania, with its past and present initiatives, falls under this focus, and is therefore analyzed, due to its strategic importance.

The analysis consists in: highlighting the problems similar initiatives have faced in the past (that have impeded their implementation); the identification of the major risks that can endanger the implementation of similar actual and future initiatives; exploring some risk management techniques to reduce the overall risk of project failure.

2 MethodologyThe methodology used in this study, apart for a vast literature review, consists mainly

in qualitative research methods. Since this paper is focused on risk factor identification for a particular type of project such as large scale estate development projects, as literature agrees (Newell, 2002; Verzuh, 2003), etc., the following ways can be used to discover and identify risks: documentation reviews, brainstorming sessions, Delphi technique, nominal group technique, Crawford slip, expert interviews, checklists, analogy. The method chosen was analogy with similar projects and expert interviews.

Interviews have been conducted with 14 experts, among which high rank executives of METE1, director of METE unit responsible for Industrial Parks development, METE experts for IP2 development, State Aid and Trade Policy, representants of programs

1 METE: Ministry of Economy, Trade and Energetics2 IPs: Industrial Parks


offering assistance in this field, such as UNDP office for Trade Promotion, and also former executives of former National Unit for Free Zones development. The interviews were individual face-to-face, consisting of half-structured and open-ended questions.

Through the interviews we tried not only to prepare a list of most relevant risk factors, but also to evaluate their impact and probability, in order to discuss the most appropriate technique of risk management for each situation.

3 Risk factors associated with large scale estate development projects – A literature review

Risks in large estate development projects are arisen by several factors. Nazari and Beheshti (2010) identify the following risk categories for large scale projects: political/legal risk factors, financial risk factors, economic risk factors, technical risk factors, design risk factors, management risk factors, resources risks and logistics risks.

Regarding large estate development projects, as defined by Morrison (2007), Gehner, et al. (2006) and Clarke (1999) list Social, Technological, Economic, Environmental and Political factors or “STEEP” factors. For example, risks in this kind of project have been considered in relation to the separation of design from construction, lack of integration, poor communication, uncertainty, changing environment and increasing project complexity and economic changes such as inflation and deflation, regional economic crises including greater competition in this business. Thus, risks and their consequences must be considered and should not be underestimated, since those risks will impact overall project management processes, in regard to project programme delay, project cost overrun and the usage of the property, which cause a huge lost in project income.

Khumpaisal and Chen, (2009) use the STEEP factors for risk criteria identification, including the five major criteria, but they expand the analysis with 33 sub-criteria. This is summarized in the Table 1 below, which classifies both quantitative and subjective risks.

Table 10.1 — Risks Assessment Criteria for the real estate development. Source: Khumpaisal and Chen (2009).

Risks Risk Factors Evaluation method

Social Risks

Workforce availability Degree of Developer's satisfaction to local workforce market

Community acceptability Degree of benefits for local communitiesCultural compatibility Degree of business and lifestyle harmonyPublic hygiene Degree of impacts to local public health and

safety


Technological Risks

Site conditions Degree of difficulties in site preparation for each specific plan

Designers and Constructors

Degree of Developer's satisfaction to their performance

Multiple functionality Degree of multiple use of the propertyConstructability Degree of technical difficulties in constructionDuration Total duration of design and constructionAmendments Possibility of amendments in design dhe

construction Facilities management Degree of complexities in facilities

managementAccessibility and Evacuation

Degree of easy access and quick emergency evacuation in use

Durability Probability of refurbishment requirements during buildings lifecycle

Environmental Risks

Adverse environment impacts

Overall value of the Environmental Impact Index

Climate change Degree of impacts to use and value due to regional of climatic variation

Economic Risks

Interest rate Degree of impacts due to increment of loan rate

Property type Degree of location concentrationMarket liquidity Selling rate of same kind of properties in the

local marketCurrency conversion Degree of impact due to exchange rate

fluctuationDemand and Supply Degree of regional competitivenessPurchaseability Degree of affordability to the same kind of

propertiesBrand visibility Degree of Developer's reputation in specific

developmentCapital exposure Rate of estimated lifecycle cost Lifecycle value 5 year property depreciation rateArea accessability Degree of regional infrastructure usabilityBuyers Expected selling rateTenants Expected annual lease rateInvestment return Expected capitalization rate

Political Risks

Political Groups/Activists Degree of protest by the urban communitiesCommercial Tax Policy Rate of commercial tax impactLocal Tax Policy Rate of Council local taxCouncil Approval Total days of construction, design approval

process by city councilLicence Approving Total days of licence approval process

Another study of the best practices in Industrial and Business Parks Development


in the SEE Region3 conducted by FIDIBE4 in 2010, identified the following as the most important risk categories that affect this kind of large scale project, in order of importance: insufficient operational income from provision of services; weaknesses of management; organizational risks; lack of premises for new tenants; investors stop to provide additional funding; technology transfer related objectives not met; changes in the surrounding municipality; lack of awareness; competition with other industrial/business parks; risk related to the act of God; other operational risks; other financial risks.

Figure 10.1 — Main Industrial & Business Parks Risks. Source: Answers form Best Practice providers, Manual of IBPs in the SEE Region, FIDIBE, 2010

Comment: the risks could be classified between 1-5, where 5 was given to the most important risks.

3 The study was funded by the European Union and co-funded by the Hungarian Government in the framework of the South East Europe Transnational Cooperation Programme

4 FIDIBE – Development of Innovative Business Parks to Foster Innovation and Entrepreneurship


4 Risks in Industrial Estate development projects – Case of Albania

4.1 Overview of the Industrial Estate development in Albania

The development of industrial estate in Albania through Economic Zones creation is an initiative that has started nearly 20 years ago. In spite of this, the real work started only after the creation of the National Unit for Free Zones development (in respect to Law no.8072, 15.2.1996 regarding “Free Zones”). The first identified area was in Durrësi, in approximity to the city and the sea, in a surface of 20 ha, in a very favorable geographical position. It was near the gate of the 8th Corridor connecting West and East, in a region where the World Bank was focused with large strategic projects. In collaboration with the World Bank, at the same time with this initial project, were conducted several studies for 2 other zones in Durres, 5 zones in Tirana, 1 zone in Vlora, and 3 zones in Elbasan. Feasibility studies were completed for all these zones and also were prepared development and construction projects. The National Unit for Free Zones conducted by it’s own initiative studies concerning zones in Gjirokastra (Kakavija) and Shkodra, and also, other studies that aimed the revitalization of existing industrial areas such as those in Elbasani, Durrësi, etc. But these efforts along with foreign investor’s interest, came to an end with the crisis of year 1997.

This initiative was revisited again in year 2000, with the introduction of a new improved law (no.8636, date 6.7.2000) regarding Free Zones, which exempted foreign investors from profit taxes for a 10 year period. The new measure succeeded in attracting again the attention of a considerable number of foreign investors and European financial institutions like EBRD5.

But again, after just 6 months from the new law approval, the Albanian Parliament abolished the 10 year tax exemption, as a consequence of strong pressures from IMF6, which doubted in the ability of Albanian authorities to control efficiently the trafficking of goods in and out of the zones.

The process stopped again until 2006, when the National Unit for Free Zones development was dismissed and replaced by a Directorate for Industrial Parks Development near METE. On 19.07.2007 another law was approved (no. 9789 “For the creation and operation of Economic Zones”) almost totally changed. Actually speaking, there exist 7 Economic Zones with the status of Industrial Park approved, of which 2 have been identified and proposed by METE structures (the zone of Spitalla – Durrës and the zone of Elbasani – former metallurgic plant brownfield), and the other

5 EBRD – European Bank for Reconstruction and Development.6 IMF – International Monetary Fund.


5 are unsolicited proposals from private investors or local government.

Table 10.2 — Industrial Park Projects in Albania. Source: METE

Zones and location Proposal Destination Investment

Value1. Shëngjin Industrial Park, surface 3.2 ha

“ATX International”

Industrial and Commercial Center. Light manufacturing industry.

17,054,152 €

1400 - 3000 jobs2. Koplik Industrial Park, surface 61 ha

AIIOA Industrial and Commercial Center. Confections manufacturing. Commerce. Services.

16,374 jobs

3. Spitallë, Durrës Industrial Park, surface 850 ha

METE Industrial and Commercial Center. Commercial and manufacturing activities.

109 million ALL for feasibility project

4. Shkoder Industrial Park, surface 130 ha

Shkodra Municipality

Revitalization of brownfield (Former Wire factory, Cigarettes factory, Electromechanical plant, Wood processing factory)

5.3 million USD

5. Vlorë Industrial Park, surface 125 ha

“Idea Vlora” Industrial Center. Light manufacturing, food processing.

20,819,797 €

18,586 jobs6. Elbasan Industrial Park, surface 254.7 ha

METE Revitalization of former industrial metallurgic plant area.

41 million ALL for feasibility project

7. DurrësProposal for “Free Zone” at Durrësi Port

KURUM Steel Co Sh.p.k.Tiranë

Ship repair activities. Construction of new vessels.

7.3 million €600 jobs

8. Vlorë Proposal for “Free Zone” and containers port at Triport, Vlora

“ZumaX LTD” Containers 1.7 billion €

4.2 IP projects in Albania – risks and risk management

The research in order to investigate the major risks that can endanger the IP initiative in Albania, was based on a careful literature review, on the study of best practices and cases similar to Albania, on the analysis of the chronology of events in the past and present of IP initiative in Albania and especially on experts consultation, that produced the following list of risks and some ways to manage them:

■ Lack of publicity or public awareness - If public money is used for the park’s establishment and financing, and if its marketing is poor – which


implies that the activities of the industrial park will lack visibility, certain interest groups may question the importance and sense of the operation. In this case, politicians could cut political and financial support. In order to avoid this situation, a proper marketing campaign should be conducted, including the publishing of success stories and favorable statistics in the local media. Actually in Albania, METE represents the government interests in these projects (as instruments to attract FDIs, to foster research and innovation, and to promote economic growth) and has identified and proposed the two most important areas for development, but since the renewal of this initiative in 2007, the PR activities for IPs have been very poor. The IP theme has been rarely mentioned in media and METE has failed to create even an official web page to promote the initiative and inform potential investors.

■ Financing problems - Industrial Parks represent medium-term investments, meaning that they may need 3-8 years to reach a breakeven point, and even more to reach sustainable success. If there is not sufficient financial support during this period, then financial problems will arise, which can cause disruption of the operations. This can be avoided by using development models like Public Private Partnerships, by providing extra funding by external sponsors, or by refinancing bank loans. The PPP model will be used in the development of Spitalla IP, Durres.

■ Losing sight of overall aim - In order to ensure certain revenues, or just because there are no proper candidates, IPs might select tenants which do not have the relevant technology or an innovative profile. So it becomes a simple real estate project that will soon lose support from sponsors. To avoid this, there should be a careful evaluation and decision of what should be the proper selection criteria for choosing new tenants and performance evaluation criteria for existing tenants. This would ensure the concentration inside IPs of tenants that correspond to the required business profile. Although METE is the promoter of the initiative in Albania, it has only set general objectives to achieve through IPs without yet specifying any selection or performance criteria.

■ Risks related to IP owners or sponsors - This can be also considered political or personal risk. If there is a political or personal change on the owner’s/sponsor’s side during the implementation or operation phase, it may change the level of support (financial, professional) for the project. To prevent support withdrawal or reduction, politically balanced supervisory bodies should be formed. Also, in case of change of owner / sponsor, success should be reported to the new decision-maker on time and every contract, service and work agreement should be documented properly. Regarding the situation in Albania, one of the largest risks regarding IP projects is the lack of sufficient and constant


political support from the Government as the main sponsor. Although when spoken of, it is considered of great importance, this initiative for years has gone in and out of the focus of the governments, which has caused the constant delay of the kick start of the projects.

■ Land or building selection/purchase risks - The presence of hidden legal, technical problems with the selected land/building can cause lots of extra effort and investment needed, or can impose the selection of a new location. We can mention here the unclear property situation in Albania. In Spitalla, Durrës, the area of the IP project is state owned, but occupied by illegal constructions; in Shkodra, the area of the former Industrial Area part of the revitalization project, is fragmentized among small businesses that have long term concession contracts with the Albanian government; other industrial and infrastructure projects in Albania have faced tremendous difficulties with the cost and timing of the expropriation process. This requires strong legal and technical carefulness before purchasing/selecting the specific location.

■ Construction risks - The quality and timing of the construction may lag behind expectations, which can cause delay in the launch of the IP, or can prohibit tenants to move in at all. This means extra investment will be needed and also new tenants should be found to replace the original ones. This explains the importance of a proper selection of construction companies and strong contractual guarantees against poor quality and delays in project timing. The lack of transparence that accompanies at times the selection of construction companies for large contracts with the government in the case of Albania can increase construction risks, since it does not guarantee the best choice of the construction company.

■ Risks associated with human resources - Fraudulent behavior from employees or poor performance can cause internal effects like financial loss, or external effects like lower service level (the lack of expertise in management and especially project management in Albania). This kind of risk can be reduced by developing professional employee selection techniques and internal control and monitoring practices.

■ Economic risks - A change in the business climate due to significant economic changes in the whole country, region or in the targeted sector (such as the actual global economic crisis, the slowing of economic growth in Albania, etc.), can endanger the position of IPs. Their decline can be due to the decline of tenants’ solvency and the decline of rent rates and profitability.

■ Competitive risks - The establishment of new nearby parks could attract away existing and potential tenants. So, tenants could move out, and rent rates would be under pressure, causing profitability to decline. This can be avoided by improving effectiveness, reaching economies of scale and/or increasing service levels by additional investments and


improving marketing actions to attract clients. It is a fact that all SEE countries are trying to attract FDIs with similar strategies like IPs. All Albania’s neighboring countries have developed or are in the process of developing industrial estate projects that raise competitive risks for IPs in Albania and can cause decline of tenants solvency and the decline of rent rates and profitability.

■ Risks related to the local community - The nearby communities can oppose the establishment of the IP because of the increase in traffic, noise, perceived pollution or other environmental unwanted effects. We can mention here problems in the IP of Spitalla with illegal occupants of the area to be developed, protests of local community in Vlora against the construction of the container port and an energetic park in a strategic touristic area, etc. Protest escalation against operations, can force decision-makers to decide against location or to intervene in various forms (local regulation etc.). An environmental and social impact assessment, public hearings and targeted PR7 actions should be carried out for the prevention of these events.

5 Conclusions and recommendationsRisks and uncertainties can have a strong influence on all phases of projects.

Especially large scale projects, which are complex in term of political, legal, technical, design and organizational aspects, can suffer larger and more uncontrollable risks and uncertainties compared to conventional projects.

Three aspects of large projects or programmes make risk management desirable: their size, their requirements for large initial investments before meaningful returns are obtained, and their complexity in terms of involvement of private and public sectors.

Risks in large projects are arisen by several factors. The most common factors are social, technological, economic, environmental and political factors or “STEEP” factors.

Specific risk factors for large projects of estate development in order of importance are: insufficient operational income from provision of services; weaknesses of management; organizational risks; lack of premises for new tenants; investors stop to provide additional funding; technology transfer related objectives not met; changes in the surrounding municipality; lack of awareness; competition with other industrial/business parks; risk related to the act of God; other operational risks; other financial risks.

Regarding the development of industrial estate in Albania through Economic Zones and IPs development is not a new initiative. It has come into and out of the

7 PR: Public Relations


political focus several times in the last two decades. The lack of political and economic stability, an unstable, fast changing legal and regulatory framework, and severe problems with property rights are the main factors that have put an end to the interest of foreign investors for IP development in the past.

Actually we can speak of a renewal of IP initiative with seven Economic Zones with the status of IP approved. There have been conducted several feasibility studies, but no real work has started yet for location development. The interviews with IP professionals identified the following as the most important risk categories for IP projects in Albania: Lack of publicity or public awareness; financing problems; losing sight of overall aim; risks related to IP owners or sponsors; land or building selection/purchase risks; construction risks; risks associated with human resources; economic risks; competitive risks; risks related to the local community.

The most emergent areas that call for energetic action from the Government are the lack of publicity or public awareness – very poor IP marketing; risks related to IP owners or sponsors – lack of a constant focus on the initiative; land or building selection/purchase risks – unclear property situation; competitive risks – slow development process in comparison with competing neighbors.

6 ReferencesAdair, A., Hutchison, N., “The reporting of risk in real estate appraisal property risk

scoring”, Journal of Property Investment and Finance, Vol.23, No.3, (2005).

AIIOA, “New Opportunity for Business in Albania: “Industrial District of Koplik”, (2007).

Charette, N.R., “Large scale project management is risk management”, 1996

Clarke, J., C., Varma, S., “Strategic Risk Management : the New Competitive Edge”, Journal of Long Range Planning,, Vol. 32, No. 4, (1999).

Cooper, D., Grey, S., Raymond, G., Walker, P., “Project Risk Management Guidelines - Managing Risk in Large Projects and Complex Procurements”, Wiley (2005).

FIDIBE, Development of Innovative Business Parks to Foster Innovation and Entrepreneurship in the SEE Area, 2010.

Flanagan, R., Norman, G., “Risk management and construction”, Blackwell Science, (1993).

Gehner, E., Halman, J.I.M., Jonge H., “Risk management in the Dutch real estate development sector: a survey”, Proceedings of the 6thInternational postgraduate research conference in the built and human environment, University of Salford, UK, (2006).


GTZ, “Project Proposal: Industrial Park Durrës as a Public Private Partnership”, (2008).

Khumpaisal, S., Chen, Z., ”An analytic network process for risks assessment in commercial real estate development”, Journal of Property Investment Finance, vol.27 No3,(2009).

Kurth, U., GTZ, “Revitalization of the Industrial District in Shkodra: Situation and First Steps to Revitalization”, (2006).

MEPP, ISPM, General Industry Directorate of Albania, “Technical, Economical and Legal Aspects in the Transformation of ex Industrial Areas in Industrial Parks”, (1999).

METE, “Project Evaluation Report – Industrial Park Shëngjin, Lezha”, (2008).

Nazari, A., Beheshti S., “Risk Analysis Based Model for Super Projects Pre- Appraisal”, 24th IPMA World Congress, (2010).

Newell,M.,W., Project Management Professional, AMACOM (2002).

Rebiasz Bogdan, “Fuzziness and randomness in investment project risk appraisal”, Computers & operations research 34 (2007).

Thorburn, A., Coombes, R., EC-UNDP Trade Liberalization and Promotion Project, An outline industrial property development road map for Albania, (2006).

Totoni, A., “Economic Zones – Real opportunity for Economic Development and Growth”, PhD thesis, University of Tirana, Albania, (2009).

RISK

OBJECTIVE

MA

NA

GE

Strategies of economic development of Macedonia, the opportunity of

involvement of the country in regional and world economic trends

Mr. Harun Tairi

State University of Tetovo

AbstractThe time that we live in is the time of general actions with a lot of dynamism

and changes in different segments of life. A process is developing where the nation- states are linking with each other through multinational corporations and through the mediatory financial institutions despite the size of their territory or the number of their residents. Globalization it is not present in all the places in the world with the same shape and intensity. In places where globalization is more present the benefits are higher, while in the places where globalization is less present the benefits and the advantages from the globalization are smaller. This makes the places to open their economy and join the global economy.

Macedonia declaratively admits that its integration in this global process is one of its political priorities, however how much and in what way this policy is applied and how is realized is a debatable issue because it still has not joined how it should in the


global economical rhythm. Macedonia since 1992 started to build economical and political relation with the international community and until the 2005 achieved to get the status of a candidate for a membership in EU, a position that imposed Macedonia to make the harmonization of several regulations with those of EU. Macedonia in this period has signed a lot of agreement for a free trade. Macedonia, despite the declarations and the cooperation for integration in this global process again is facing many economical and political problems. In Macedonia, there is a weak competition of economic entities and of the overall economy, inefficient judiciary, interethnic tensions, high unemployment, high interest bank etc. Macedonia has no alternative other than its connection to the global economy that can be achieved through the implementation of structural economical long-term reforms. If a radical turning won’t be taken for this situation, not only that the roads will be closed for the inclusion of Macedonia in the global economy, but the risk to buried the hopes for an acceleration of social economic development in general, and the development of democracy and rule of law.

Globalization is not present in all countries in the world with the same intensity and form.

In the countries where it is more pronounced there are bigger benefits, while in countries where globalization is less presented the benefits from globalization are smaller too. This encourages countries to open their economies and engage in global economy.

Macedonia claims that its integration in this worldwide process is one of its political priorities. However how and how much this policy it is implemented and realized is a debatable issue. Today Macedonia is faced with numerous problems, both political and socio-economic ones. She forgets that the time in which we live and act is full with dynamism and changes. There are big changes in all segments of life. Changes have occurred also in the past, but unlike nowadays, the world has embraced the changes late, especially in Macedonia.

Development in communication technology has been applied almost in all spheres of human life. The development of communication technology and speed intensity and pace of economic development have given. The Type text or a website address or translate a document.

Quantity and volume of production and services worldwide have never reached this level. The opening of the economy of one country to the global economy has resulted in the development of international trade as never before.

The globalization takes parting every segment of the contemporary life. It is present in economy, politic, law, sociology, language, movie, culture, music, international relations, communication, environment, etc. The full understanding of the globalization requires studies and analyzes from different points of view, because in society changes happen in many spheres. The economic globalization is distinguished with the freedom of action of the enterprises outside the states boundaries, which have as a primer goal the maximization of profit. In the global society a special place

Mr. Harun Tairi 121

has the concentration and the centralization of the financial capital which Macedonia doesn’t have it.

The raise of the volume of production it’s one of the characteristics of the globalization, and is especially distinguished in these sectors: industry, trade and the sector of services. The international trade it more liberal than it ever was.

The globalization is included in each segment of contemporary society.Type text or a website address or translates a document. It is present in the economy, politics, law, sociology, language, film, culture, music, international relationship, communication, environment, etc. Knowledge and understanding of globalization requires comprehensive study and analysis by many angles, because the company processes in many areas. The direct foreign investments are more present in the economy of the countries.

No doubt that the increase of a country’s economic growth depends on a number of factors. Among them are: increased productivity, increased accumulation, saving, investing, the country’s natural resources, the level of professional knowledge and human knowledge etc. With the aim of increasing economic growth recently more importance is devoted to the advancement and the improvement of human capital, the savings, establishing institutions and social policy, protection of property rights etc. In this segment an important place has the liberalization of trade is that increased economic efficiency by making rational allocation of natural resources

1 Macedonia’s integration Integration of Macedonia and other counties with small economies into the global

economy is more than necessary. Today almost all agree that the act of integration represents one of the main conditions that increase a country’s economy. Macedonia since 1992, begins to build economic and political relations with the international community and especially with European Union. In 1997 it managed to implement major steps towards cooperation with the European Union. Since 1992 Macedonia begins to build economic and political relations with the international community and especially with European Union. In 1997 it managed to implement the major steps towards cooperation with the European Union. So this year in April 29, 1997 was signed the agreement for cooperation between Macedonia and EU in the framework of which several agreements were signed as: agreement for the transport, the textile agreement, the agreement to put, financial cooperation protocol etc.

This enabled Macedonia to borrow loans and other financial resources from various institutions and programs of the EU. The year 1999 will mark the biggest turnaround in the relations between Macedonia and the EU, because then begun the preparations for the agreement about the Association and Stabilization. The first phase of this process last till 2001 when Macedonia signed the contract of Association and Stabilization. It was the first contract of this kind that EU Signed with a West


Balkan state. In April 2004 the contract for Association and Stabilization was enforced and Macedonian economy gained privilege in the market of European states in comparison with the non member states. In 17 December 2005 Macedonia achieved to get the candidate status for membership in EU and Adriatic Charter together with Albania and Croatia. The current position of Macedonia imposed it to harmonize a lot of regulative with those of EU. This happened also with the policy of foreign trade where a special part has the harmonization of customs law.

The establishment of the Free Trade Zone within Western Balkan states now it’s not anymore just an idea, bur a reality. This step would help enough the increase of market trade, attracting direct foreign investments and economic development of these countries. The establishment and function of CEFTA is a good experience from which we understand that the member states of this kind of integration gain a lot from the raise of trade, the FDI and economic growth. SEFTA (Southeast European Free Trade Area)will sure be a lead to the membership of Western Balkan. Within this integration is forecasted that despite the trade with goods, a subject of agreements to be the sector of services, intellectual property and the protection of the right for intellectual property. The operation of this kind of integration will be a good image for these countries, and the trust of foreign investors will increase. Macedonia has also signed CEFTA. CEFTA represents forum of former socialist countries which show interest to intensify the relations between them. Most of the members of CEFTA are already members of EU, so lately the importance of this association has decreased. Macedonia joined the other three members of CEFTA, Bulgaria, Croatia and Rumania, which means that the trade between Macedonia and the other members of CEFTA will be liberated. A part of the goods that are part of the trade, immediately will be free of custom taxes, while for some goods the customs taxes will gradually decrease till the elimination of these taxes. CEFTA for Macedonia has a special importance and it means deepening of the economic cooperation, liberation of the market, joint participation in foreign markets and exchanging experiences with the countries that are members of CEFTA.

The biggest step toward its economic global integration Macedonia made it with its membership within the organization of world trade. This was realized after an activity and long self denied work in April 2003. Membership in this organization has advantages and benefits but also the responsibilities and the obligations are not small. Macedonia in this period also signed a number of contracts for free trade with its neighbors. Macedonia has implemented 11 contracts for free trade from which 9 were made in bilateral bases in this countries: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Moldavia, Rumania, Serbia and Montenegro, Turkey and Ukraine, and two of them were in multilateral bases like the agreement for free trade with the countries of EFT and the agreement for Stabilization and Association in EU. With the mentioned countries Macedonia realizes free trade in different percents of liberalization.

These kinds of contracts have included the total elimination of costumes and other quantitative limitations in the trade between the parts that were contracted. Despite the full liberalization this contracts have foreseen the regulation of many

Mr. Harun Tairi 123

other issues such as: technical barriers in trade, sanitary and phytosanitary measures, regulations of the origin of goods, antidumping data and compensatory, protective measures from increased imports, public supplies, etc.

If analyzing period from 2005 - 2008 will prove that R.M. every year marks a growing deficit trade (because the greater percentage of import) even though every year we increase trade exchange, so if we analyze 2005 will we see a trade exchange value of USD 5,275,133 thousand, where the export has taken part with 38.7% (2,042,296 thousand USD) while imports by 61.3% (USD 3,232,837 thousand) which represents a cover of imports by 63.2% for export trade deficit and the value of 1,190,542 thousand USD.1

This growing trade deficit continues in 2006 with the value of 1.362.000 thousand USD since the export was USD 2,400,715 thousand or 39% of commercial exchange and the import this year also was the highest, with a value of 3. 762. 715 thousand USD or 61% of the market trade. In 2007 the trade market was in value of 8.583.823 thousand USD which was 39.3% higher than in 2006. The export in this year in Macedonia was 3.356.248 USD while the import was 5.227.576 thousand USD where the coverage of export with import is 64.2%. Form this we understand that the market deficit was 1.871.328 thousand USD which represents 37.4% higher value than in 2006.

Not in 2007 and not even in 2008 the market trade didn’t achieve to decrease the trade deficit in the balance of payments even though the trade market in 2008 was for 31.8% higher than in 2007. Rather every year that comes there is an inevitable trade deficit, which in the period January-November 2008 the value get to 2.662.629 thousand USD which is 42% higher than in 2007. According to the state Statistical Office, the value of export in Macedonia in 2008 was 3.748.123 thousand USD while the import was 6.410.753 thousand USD. This means that the coverage of export and import is only 58.5%.2

The biggest partner with whom Macedonia develops the trade in the field of export and import are: Serbia, Germany, Italy, Croatia, France, USA, Turkey, Bulgaria, Slovenia and Russia. With some of this countries Macedonia has achieved to have a trade surplus. Since 2001 the trade between EU and Macedonia was regulates according to the agreement of Stabilization and Association. The industrial and agricultural products were exported in a free way by excluding three agricultural products (veal, fish and wine), for which the EU set the annual quota. The industrial products of EU can be imported in Macedonia according to a gradual reduction of customs for a transitive period, which ends in 31.12.2010.

Similarly, in the period from January to November 2008 in Macedonia greater participation in the export of goods have the member states from EU 27 (59.4%) and Western Balkan countries (35.5%), while imports of goods have greater participation of EU countries 27 (47.6%) and developing countries (31.6%).

1 Source: Ministry of Finance (www. sei, gov.mk).2 Evaluation of State Statistical Office.


Is good to note the presence of products in trading exchange in the recent years. According to the Export Statistics greater participation has feronikli, then iron and steel products, textile and tobacco. In import mostly are present the oil derivates, electricity and vehicles. Usually when it comes to foreign investment what is maenad is foreign direct investment. According to the U.S. Department of Commerce’s, foreign direct investments are defined as the value of the investment firm whose purchase is over 10%. Approximately the same is the definition of FDI States and the World Bank and IMF, while the scientific journal ‘The World Investment Report 1997’, FDI-be is defined as “investments affecting long-term Relations and reflect the interests and control a wide range of residential living in an economy ...”

Investment portfolio or indirectly represent the form of investment where the investor is “passive” and is not interested in managing or controlling assets and operations of the firm which invests. The main goal and it is only one is profit. He owns less than 10% of the number of shares that the company has available. Buying a small piece of property without control over the company is considered as portfolio investment and is not subject to our treatment this time.

Although at first glance these two forms of foreign investment seem to be the same, however they differ enough among themselves. One of the differences is that portfolio investments are investments that have short term that is not the case with foreign direct investment. Investment portfolio could quickly be withdrawn from the firm to be filled in other firms. One difference is that portfolio investments have it as its goal the rate themselves as higher interest rates, as distinguished from FDI investment portfolio, because the investor FDI States except capital firm invests in people and technologies, knowledge, methods, experience etc. This boosts the investors to be interested in leadership, control and Management Company which invests. What form of investment will be entitled to a foreign investment will be identified by who controls the response company in which investment is made. If the foreign investor has direct and effective control over the company’s foreign investment it is called direct investment (direct) foreign, and vice versa, if the foreign investor has no control over foreign investment in the company, than the investment is called portfolio investment.

Benefits of the host country of foreign direct investment are numerous, but will distinguish these: Increasing the number of employees in the country, revenues in the form of taxes, increased competition in the internal market, decrease in monopolistic profit, enhanced quality products, inclusion in the international market, etc. Utility and benefits shareholders and other places have so “home country” among them would mention: transactional corporations benefit advantage by paying low wages to workers abroad, technology transfer and opening of new markets, increase production capacity improvement of export, etc. FDI has a great importance in the running economic development of Macedonia. They are also important in terms of advancing the process of production, transfer of technology, optimal utilization of production capacity and better organization of work. Macedonia since its independence cannot be satisfied with FDI. During the transition period it was always the last place in terms of foreign direct investment. Greater amount of FDI-s (449 Million USD) performed

Mr. Harun Tairi 125

in 2001, when denationalize telecommunications. FDI in 2003 failed more than 80 million USD in comparison with the previous year had a slight increase of 2.8 million USD. FDI 2007 is 330.8 million which compared to 2006, marks a decrease of 19.9 million USD nominal increases of 8.8% compared with 2006.

The biggest investment in 2007 was conducted in the financial mediation with a value of $ 107,190 thousand or 32.4% of FDI, the industry invested $ 72 982 thousands or 22.1% of FDI in the sector for electricity, gas and water have been invested $ 67,870 thousands of FDI, etc. The distribution of the FDI in 2007 in the amount of $ 330,802 through thousands of different sectors can be seen in the table below:

Table 11.1 — FDI in Macedonia 1997-2007. Source:State Statistikal Office of Republic of Macedonia (www.stat.org.mk).

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 200730902 112308 38079 152270 449104 77812 80643 139000 116200 350700 33080

States that have achieved greater value in RM FDI in 2007 are: Austria 90.5 million $, Slovenia 53.3 million $, Bulgaria $ 45.7 million, France $ 30.2 million. In 2007 a higher valued than FDI there is in the Mediation Sector where are invested 107.2 thousand USD. In 2007 workers in 1655 increased compared to the situation in 2006. Gross average wage for a labour in 2007 in the business subjects with FDI is 27 828 denars and shows

Table 11.2 — FDI through different sectors in RM. Source: State Statistikal Office of Republic of Macedonia (www.stat.org.mk)

Value in thousands USD

Structure in %

Total 330,802 100 TotalAgriculture 3,040 0.9 Agriculture, hunting and forestryXehtari 13,272 4 Mining and quarryingIndustry 72,982 22.1 Manufacturing Electricity, gas and water 67,870 20.5 Electricity, gas and water supplyConstruction 16,168 4.9 ConstructionTrade 14,816 4.5 Wholesale and retail tradeHotels and restaurants 11.500 3.5 Hotels and restaurantsCommunication and connection

16.675 4.4 Transport. Storage and communication

Financial mediation 107.190 32.4 Financial intermediationEstate firm, renting and business activities

8,051 2.4 Real estate, renting and business activities


Figure 11.1 — Data (%) shown in a pie chart.

Causes of such a small investment in Macedonia FDI are numerous, but most important are:

■ Stagnation in implementing structural economic reforms ■ Broken legislative sector reforms ■ Malfunctioning due and not judicial trends ■ The presence of organized crime corruption ■ No safety and unstable political situation, etc.3

In fact, together with Kosovo and Macedonia and Bosnia and Herzegovina present less developed countries within the SFRY. For years Macedonia even within that community constantly was marking decrease in GDP, negative trade balance, increasing the number of unemployed, had an old technology and worn and decreases in the welfare and living standards of the population. Macedonia’s economy depended mainly by joint Yugoslav market. It was nearly 75% focused on producing raw materials for production capacities of other republics where was distinguished the metallurgy industry, textile industry and its chemistry. Almost one quarter of Macedonia’s next export was in the in textile products, while the fifth was in the sale of iron and steel.

3 Kikerova Irena : International Economy, Skopje, 2003. Source: State Statistikal office of Republic of Macedonia (www.stat.org.mk)

Mr. Harun Tairi 127

The first 5 years of the independence of Macedonia passed in the mark of biggest crises of this country. In this period GDP had a reduction in average from 5.4%, where in 1993 it was amounted to -9.1%. While in 1990 GDP per capita was $ 2.235,in 1995 had a reduction to $ 1705. This situation was improved after the successful realization of the Program for stabilization, so in 1996 the country’s GDP was stabilized. Here without doubt pretty important role have played different foundations and donators from Europe and beyond. In the next years Macedonia will sign free trade agreements with some neighbour countries, while very important is the moment of signing of the Agreement for cooperation with the European Union. In 2003 Macedonia will become member of the World Trade Organization and her economy was liberalized almost completely.

After year 2000, Macedonia’s economic structure undergoes minor changes so the industry in 1997 was 29% of the GDP, while in 2003 was reduced to 24%. In the same period there were changes regarding the involvement of the service sector. So from 51% as it was in 1997, was increased to 56%. Basing in the report of the global competition which is organized by the World Economic Forum in 2007 Macedonia was ranked in 94th place from 131 totals instead. This ranking is ten places below then a year earlier. The weakest ratings of Macedonia are in: inefficiency of state administration, access to finance, corruption and the economic instability. The higher rankings are: macroeconomic stability, inflation and the devisor course.

Foreign direct investment in 2005 reached 116.2 million U.S. dollars and compared to 2004 they are decreased to 23.3 million dollars. According to State Institute of Statistics the biggest foreign direct investments in value of 74.8% U.S. dollars, are from the developed countries, 55.3 million U.S. dollars which are from EU countries and 16 7 million dollars from countries-members of EFTA. The biggest investment is in the processing industry where invested 54 million dollars are and also in extraction of minerals and stones where are invested 26.6 million dollars. Participation in these activities in foreign direct investment reaches 69.4 percent.

Total number of employees in the business entities with foreign direct investment in 2005 grew to 3132 employees, compared with the situation in 2004. Also from China, Russia and Germany is expected support to speed up the steps towards the EU.

Macedonia must in future to focus on certain segments in order to go forward and benefit from globalization. The steps that will be taken are:

1. Leadership of an open economy policy

2. Leadership of a policy of attracting foreign direct investment especially Greenfield and export oriented sectors

3. More rational use of European funds


2 ConclusionGlobalization above all is victory of the multilateralism and market economy. The

Keynes concept on state intervention in the economy, definitively in the last decade of the 20th century suffered total defeat. Neo-liberal theory prevailed and remained confident in the development of the economy. Countries which support the theory strongly are also the most developed countries in the world such as: USA, Japan, Germany, Italy, UK, etc. Lately we have intensive economic development in a number of state who until recently have been developing countries. Within these states are taking part also the so-called BRIK countries (Brazil, Russia, India and China). According to a German Bank approach, BRIK states in the 21st century will dominate the world economy. China now has trillions of dollars in monetary reserve, India has developed high technology, and the other two countries have nuclear weapons production.

Macedonia has no alternative but to conduct an active policy for its inclusion in the global economy. We underline this, because Macedonia still today is not sufficiently involved in global economic procedures. We can even see higher walls between Macedonia and EU countries. With the recent actions (visas for the citizens of Albania) further complicates the integration of its economy and opening to the world economy. This confirms to us that the Republic of Macedonia has not yet emerged from a period of transition mainly because the fault of the policy that it leads. RM have also internal problems: the long and non-transparent procedures, corruption, inefficient judiciary, ethnic tensions, high bank interest rates, high unemployment, the construction mafia, political pressure, etc.

Republic of Macedonia feels weak competition of economic entities and the economy as a whole. Macedonia if it wants to reach the world economy, then will have to realize long-term economic structural reforms. Macedonia’s economy should be opened as much as possible and this opening to be used wisely and efficiently maximized. In this context, Macedonia must provide quantity and quality of goods and services to world market demands. So to change the structure of export structure that is also the country’s economy. Traditional economic branches (such as agriculture) is not leading the economy forward, but have committed resources in the industry, especially in the services sector. Even if they develop the agriculture, it should not be developed without plan, but should take place in organizational structure. In addition to changes in the structure of international exchange, first of all it should be done with more countries, not only with a small number of countries.

Changes and advancements must be done in terms of access to the FDI, because they include only 2% of GDP which is very little compared to other countries. Special importance should be given to FDI “green-filed” and those branches that are export oriented). Also, foreign investors must be offered special packages to attract FDI and persuade them to great profit and not for rehabilitation of the local economy.

Macedonia is in situation where (a candidate for EU member) a number of

Mr. Harun Tairi 129

European funds will be “flooding” the country. It should rationally use the European funds by developing their own capacity to govern the European funds. This could be done in the best way if it generates projects which will be implemented effectively.

3 LiteratureAgency for Foreign Investments of the Republic of Macedonia, Macinvest (www.

macinvest.org.mk).

European Sector for Integration (www.sei.gov.mk).

Ilia Kristo: International Business, Tirana, 2004.

Irena Kikerkova: International Economy, Skopje, 2003.

Joshua S. Goldstein: International Relations, Tirana, 2003.

Mansfred B. Steger: Globalization, Avery Short Introduction, Oxford, 2003.

Ministry of Finances (www.finance.gov.mk).

Ministry of Economy in R.M (www.ekonomy.gov.mk).

Musa Limani: European Economic Integration, Prishtina, 2004.

Office for Statistics in R.M. (www.stat.gov.mk).

Skender Berisha: International Economy, Prishtina, 2002.

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The importance of public funds, their management issues

Lorenc Kociu,* Drita Luzo,** Irena Boboli***

University “Eqrem Çabej”, Economic Department, Gjirokaster, Albania*M.Sc., @: [email protected]

**Doc. M.Sc., @: [email protected]***M.Sc., @: [email protected]

AbstractIn our country, we already encounter with the phenomenon of mismanagement

of public funds. This is a more acute problem, as directly affecting the state budget.This paper will try to show the way public funds are managed by public

institutions in Albania, cases of abuse and how to improve the process of their use. This fact because there is a tendency for the abuse of public funds and the abuse reaches substantial monetary value. The audit reports of the High State Control for the period 2005 to 2010 are taken into consideration to set this paper.

Through this paper we aim to give the reasons for the improvement of public funds use, the increase of managers’ responsibility in the use of public funds, and some future alternatives and innovations, which the public sector will face in the future due to rapid technological development and crises that may arise in the future.

Key words: Audit, public revenues, public expenditures, technological development, the public sector.


1 IntroductionPublic funds play an important role in the development of a country and for this

reason it has been given a great attention by many researchers. This is justified by the fact that public funds are part of a great many financial instruments and cash. In Albania, a great interest has been given to public funds after the ’90-s, period when the system of governance changed and the economic system as well. From this period until now, a lot of important changes in public funds management have been made, aiming at a better use of them and a minimization of their abuse.

In this paper we will try to evidence the grounds of misuse of public funds, the difficulties faced by public administration employees in understanding and managing risk to public funds.

The notion of public funds is very broad, including that of expenditure on salaries, social insurance for employees of public administration, operating expenses, pension funds, public investment, etc. and public revenue.

In this study we are trying to take into survey some elements of public expenditure. Also it is worth mentioning the fact that no survey is being taken in the creation, collection and administration of public revenues. It is a case that needs a special paper due to the nature and the wider problematic. In this study we have not taken all the voices that make up public spending, but only a part of them, it is because of the wide scope of these elements and inability to be summarized in a single paper. It remains the task on our part to be taken in future study in the works.

In this group of large public funds, normally there is a place for their misuse. Abuse of public funds can be caused for many reasons, such as: the idea that the funds belong to state and abuse affects only state coffers and not the individual, the idea that responsibility is lower in the case of abuse of public funds compared with private funds, the fact that until now there has not been heavy penalties due to abuse of public funds, a poor management of public funds by responsible persons, etc.. All these reasons have made to reinforce the idea that the abuse of public funds is an action easier and less punishable in the public sector.

2 Public funds and their importancePublic funds are a growing group of instruments in the hands of the public sector,

which are used to achieve the goals and objectives relevant to this sector. Through these funds, the public sector makes possible the existence and continuation of its activity. More specifically, public funds are all monetary assets, which are collected, received, maintained, distributed and spent by public sector entities that consist of revenues, expenditures, loans and grants for public sector entities.

It can not be thought that a state is not able to create income and to perform public

Lorenc Kociu,* Drita Luzo,** Irena Boboli*** 133

expenses, because in this case we could not speak about a state anymore. Public funds are of a great importance, so great should be the importance of their management too.

Financial management and the control of public funds implies a system of policies, procedures, activities and controls, which are placed, maintained and updated regularly by the director of each public entity and implemented by all staff . The reason is simple: to address risks and to provide warranty enough that the unit objectives will be achieved through its public;

1. In compliance with legislation and internal acts of contracts;

2. Operational, reliable and complete financial information;

3. Effective, efficient and economic activities, and

4. Protecting information and assets.

Public funds should be used according to the legislation of each country, because only in this way it will be possible, to avoid abuse firstly and secondly their effective use. Losses states that suffer from public funds abuse occupy a considerable percentage of their budgets, so for example in Albania report economic damages / GDP. This is shown in Table 1.

Table 12.1 — (Source: Data were collected by the control statements for the years 2005 - 2010 by the State Supreme Audit)

Year 2005 2006 2007 2008 2009 2010Economic damage /GDP 0.041% 0.046% 0.047% 0.025% 0.025% 0.011%

Given the difficult economic period in which we are experiencing, these losses arising from public funds abuse are the most serious, because in this time of crisis a single penny must be used effectively and it has to be avoided as much abuse, as it is possible.

3 Managing the risk of public fundsDuring the usage of public funds we encounter the meaning of risk associated with

these funds. It is a very significant element of time during their use. In its general sense, risk is the probability of occurrence of a certain event, which will affect the achievement of the objectives of public entity. Risk management related to public funds includes identification, evaluation and control over those events or situations likely to have detrimental effect on meeting the objectives of the public entities and is made to give reasonable assurance that these objectives will be realized. Risk will be measured according to its effects and the degree of situation probability. The persons responsible for public entities record and report the measures taken to prevent fraud and irregularities and to minimize risk.


But, understanding risk and its management it is not an easy think, because in most public institutions in Albania risk and its management is understood with difficulty or not at all understood by the employees of these institutions. To manage and to keep risk under control, to avoid abuse of public funds, managers of public institutions have to plan and to make periodic checks of any case. These controls should ensure that risks associated with public funds are within acceptable limits, determined during the risk management process. We must not forget the fact that the cost of performing the control activity should not in any case exceed the expected benefits. These checks must be directed toward such procedures;

a. system of two firms, which allows no financial commitment made without the signatures of the authorizing person and the person administering to a public entity,

b. the system of two firms, which prevents the payment to be made without the signatures of the authorizing officer and civil enforcement unit, or their employees to act on;

c. separation of duties in the field of the authorization so that the same employee shall not be liable at the same time for the proposal, adoption, implementation, accounting and control process,

d. accounting procedures for complete, accurate, fair and timely to all transactions

e. regulations of documentation of all transactions and activities related to the performance of the unit;

f. rules for ensuring the preservation of information and assets of the unit.

4 Problems concerning the use of public fundsIn the above cases we tried to explain in a summary the meaning of public funds

and risk management. An important task of this paper is the identification of problems related to the use of public funds. Problems arise in different ways, for example, problems related to salaries and remuneration, with operating costs, investments, with taxes collection, public procurement, etc... In this paper we are focused mainly on issues identified by the State Supreme Audit in Albanian Republic for the period 2005 to 2010. During the work carried out by this institution, there were evidenced a great number of abuses of public funds by public institutions.

One of the main problems that occur mainly and repeatedly in all public institutions is the abuse of funds, salaries and bonuses. This kind of problem has always been a constant problem more serious at public institutions. During the period 2005 - 2010, abuse of funds salaries and bonuses is presented in Table 12.2.


Table 12.2 — Economic damage in “wages and benefits” (in thousand LEK). Source: Data were collected by the control statements for the years 2005-2010 by the State

Supreme Audit.Year 2005 2006 2007 2008 2009 2010Wages and benefits 39.770 77.405 6.476 3.720 10.222 348.9

Table 12.3 — Economic damage in “wages and benefits” (in USD). Source: Data were collected by the control statements for the years 2005 - 2010 by the State Supreme Audit

Year 2005 2006 2007 2008 2009 2010Wages and benefits 383,954 822,233 78,128 42,316 106,690 3,355

According to the above table, we see that every year there has been funds abuse in salaries and bonuses, despite repeated inspections that are made to institutions for disciplining the use of these funds. Management and control have to be better in order to eliminate the abuses of these funds.

4.1 Problems associated with planning funds

One of the many problems is the incorrect planning of funds which are used by public institutions. It is now a practice performed by the public institutions to plan much more funds than their actual needs. This is obvious in a comparison between the planned funds and those realized during a one year period. Table 4, highlights the non accurate planning of funds, resulting in the end of each year a considerable amount of unrealized funds.

This defect in planning has consequences in the state budget, which is trying to plan more funds, setting in motion the respective governmental structure in order to ensure these funds while the public institutions needs are less. During the year 2005 there has not been a full realization of 16.637 million LEK or 160.6 million USD, in 2006 no realization of 9.192 million LEK or 97.6 million USD, in 2007 no realization of 19.353 million LEK or 233.5 million USD, in 2008 no realization of 5.740 million LEK or 65.3 million USD, in 2009 no realization of 21.649 million LEK or 225.9 million USD and in 2010 no realization of 9.016 million LEK or 86.7 million USD. Naturally, arises the below question “Why is this situation from year to year?” We think that the problem begins at the stage of the implementation of the planning procedures and the approval procedures in the sector of economics, whose financing occupies a considerable weight in the total capital investment of the state budget, where it was found that the central responsible institutions have not applied the criteria of prioritization of investment’s allocation and details. It is also concluded that the financing of the investments it is not made in the project level in the value of investment costs, but the breakdown and the allocation are carried out partially and in small values, leading to the dismemberment of funds, leading also to the extension


of facilities in several budget years, actions that have reflected in the decrease of the level of competition, as well as the inefficient use of these funds.

Table 12.4 — The non accurate planning of funds (in million LEK). Source: The data were received by the control statements for the years 2005 – 2010 by the State

Supreme Audit.

Designation 2005 2006 2007 2008 2009 2010Difference Difference Difference Difference Difference Difference

Total costs(+,-) % (+,-) % (+,-) % (+,-) % (+,-) % (+,-) %

(16,637) 6.7 (9,192) 3.4 (19,353) 6.3 (5,740) 1.6 (21,649) 5.4 (9,016) 2.4

Table 12.5 — The non accurate planning of funds (in million USD). Source: The data were received by the control statements for the years 2005 – 2010 by the State

Supreme Audit.

Designation 2005 2006 2007 2008 2009 2010Difference Difference Difference Difference Difference Difference

Total costs(+,-) (+,-) (+,-) (+,-) (+,-) (+,-)

(160.6) (97.6) (233.5) (65.3) (225.9) (86.7)

4.2 Implementation of legality

Another fundamental problem is the incomplete implementation of legality of the use of public funds. It is known that the use of these funds is based in the laws of each state, in a way that these funds are used effectively and efficiently, and to avoid the abuse and their misuse as much as possible. During the period of the study was observed that not always the use of the funds by public institutions is based on the relevant legislation, this due to many factors, and as the most important can be mentioned (1) the complete ignorance of the legislation from the persons responsible for the use of funds (2) avoiding the implementation of the legislation in order to obtain illegally public funds. If we can refer to the procurement process during the period of the study 2005 - 2010, it was noted that there were numerous problems that have caused economic damages according to the Table 6.

Table 12.6 — Economic damages during the procurement process (in thousand LEK). Source: The data were received by the control statements for the years 2005–2010 by

the State Supreme Audit.Year 2005 2006 2007 2008 2009 2010Procurement 245,136 54,402 384,889 165,680 37,001 36,165


Table 12.7 — Economic damages during the procurement process (in thousand USD). Source: The data were received by the control statements for the years 2005–2010 by

the State Supreme Audit.Year 2005 2006 2007 2008 2009 2010Procurement 2,366.6 577.9 4,643.3 1,884.6 386.2 347.7

Table 8, presents the cases of legal violations during the procurement procedures of the period of the study. As shown on Table 5, the biggest violations are noticed during the draft of the documentations of the bid as well as during the procurement procedures. We cannot say exactly which is the tendency of the violations during the years, increase or decrease, because the tendency of legal violations despite the controls and the measures which were taken have been fluctuated, e.g. the legal violations in the phase of procurement procedures tended to decline in 2008, specifically 18 %, and in 2009 there was a 30% increase reaching 42 % in 2010.

Table 12.8 — Violation identified during the procurement process. Source: The data were received by the control statements for the years 2005 – 2010 by the State

Supreme Audit.Type of the abuse 2005 2006 2007 2008 2009 2010Draft of the bid documents 37% 19% 50% 44% 54% 54%The process of the procurement procedure 50% 58% 35% 19% 30% 42%Contract implementation 8% 23% 15% 37% 16% 4%Documentation and archiving of documents 5% 0% 0% 0% 0% 0% Total 100% 100% 100% 100% 100% 100%

5 Conclusions and recommendationsFrom this work emerged the gaps that do exist in the management of public

funds, resulting in economic losses with considerable values. We may say that there is a tendency of the major part of public administration to abuse with public funds, abuse which may be deliberately or as e result of not knowing exactly the respective legislation. This abuse with public funds has caused considerable damages to the state budget, so during the period 2005 -2010 on the basis of controls carried out in most ministries and other public institutions results that there has been a economic loss of 137.942 thousand LEK or 1,437 thousand USD in salaries and bonuses, and in procurement the loss reached 923.273 thousand LEK or 10,206 thousand USD. Also, it is worth mentioning the fact that there is no special importance toward the planning process, resulting in greater planning for public funds than there are actually consumed, and especially during the period 2005 -2010 there was a non – accurate


planning of the funds in the total value of the 81.857 million LEK or 869.7 million USD. Thus, the state has provided 81,587 million LEK or 869.7 million USD, possibly through debt, but this amount was not used from the public institutions, which had been planned as necessarily funds during the planning process, increasing in this way the inefficiency of the use of public funds.

In conclusion, we can say that:

1. From the public administration employees, who use public funds, it should be given a greater caution in the management of these public funds.

2. It should be understood precisely the notion of risk in the management of public funds.

3. It should be given the exact importance and commitment the planning process of public funds.

4. It should be taken harsh measures against employees that abuse and misuse public funds.

5. It should strengthen the internal audit system in public institutions.

6. There should be rigorous request in the application of the legislation in the use of public funds.

7. There should be viewed the possibilities for further improvement of the legislation on the use of public funds.

6 ReferencesAlt, James E. and Lowery, Robert C. 1994. “Divided Government, Fiscal Institutions,

and Budget De®cits: Evidence From The States”, American Political Science Review.

Cordes, Joseph J. 1996. “How Yesterday’s Decisions Affect Today’s Budget and Fiscal Options,’’ in C. Eugene Steuerle and Masahiro Kawai (eds.), The New World Fiscal Order: Implications for Industrialized Nations. Washington, DC: The Urban Institute.

Crain, W. Mark and Muris, Timothy J. 1995. “Legislative Organization of Fiscal Policy,’’ Journal of Law and Economics.

Eric M.Patashnik “PUTTING TRUST IN THE US BUDGET” Cambridge University Press, 2003.

Kontrolli i Lartë i Shtetit, “Raport mbi zbatimin e buxhetit të shtetit”. Reports of 2005, 2006, 2007, 2008, 2009, 2010.

Olivia S. Mitchell, John Piggott, Cagri Kumru, “MANAGING PUBLIC INVESTMENT


FUNDS: BEST PRACTICES AND NEW CHALLENGES”, 2008.

Truman, Edwin. 2007(a). “Sovereign Wealth Funds: The Need for Greater Transparency and Accountability”, Washington, DC: Peterson Institute for International Economics.

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The impact of global financial crisis on economic growth in Macedonia and the

role of fiscal policy

Petrit Pollozhani,* Luljeta Sadiku,** Blerta Demishai***

State University of Tetovo*PhD

**PhD candidate*** MBA

AbstractThe purpose of this paper is to examine the impact of global financial crisis in

terms of output losses in Macedonia relative to South East European countries as well as the impacts of fiscal policy which have been part of anti crisis package, in order to stabilize the national economy, i.e. improving the economic performance in the period of recession. Econometric models are employed to analyze the impacts of the crisis on main macroeconomic indicators. By using the panel regression, we found that fixed effects are higher in the period of the crisis rather than in the pre crises period. Particular importance is given to real output, government expenditure current account deficit, trade openness, and investment to GDP ratio.

Key words: global financial crisis, fiscal policy, economic performance.


1 IntroduconIn today’s global economy, many countries have extended their reach around the

world, and so the globalization process has increased and intensified the economic inter-dependency among countries. The global financial crisis that initially was felt in the developed economies had a little time lag on the least developed countries. As regards the South East European (SEE) countries the negative impacts of crisis were recorded in the fourth quarter of 2008. The dependence of these countries’ economies by foreign capital has made the effects of global crisis to give impact on many sectors affecting the government funding of projects negatively. Different policy responses have been employed in order to prevent further development of the crisis and thus a deterioration of the real economic sector.

The fall of global economic activity from 3.8% to 0.5% in 2009, proved the doubts that financial crisis in the U.S. will not be a close event and will exceed in global recession. The transmission of crisis in other countries was very rapid and with great intensity because of higher trade and financial integration between countries. Thus, Macedonia was affected by the global crisis as well, especially in the external accounts, industrial production, budget liquidity and financial liquidity by a reduction of demand for exports, reduction of capital incomes, remittances inflows and pressure for devaluation of national currency-denar.

Optimistic forecasts for future trends in economic area must be tackled with a certain dose of reserve, at most as a result of the debt crisis of our southern neighbor, Greece. It should be considered the coming impacts of its economic policies in other countries of the European Union as well as the effects that it may cause in Macedonia, both in the real sector of the country and in the financial sector, since a large body of foreign investments is from Greek capital.

Macedonia experienced a difficult and protracted transition to a market economy due to various external shocks and internal problems in the 1990s as well as the ethnic strive at the very beginning of the 21st century. Pre-transition GDP levels were not restored until the middle of this decade because robust GDP growth was delayed until 2004-2005. Unlike some more advanced transition countries, Macedonia did not experience large capital inflows from the developed economies. Being “spared” of the excesses of a property boom fuelled by low-cost credit, Macedonia was able to avoid some of the worst consequences of the financial crisis and to become aware of the limitations of this model of growth for its economy.

Farther, the highest rate of growth of 5.9% was registered in 2007. While many indicators are showing significant improvement, and the economic policies for 2009 were projected, the global financial crisis affected the metal and textile sectors, which are the biggest exporters. As a result, GDP growth in 2009 was negative, -0.9%. Initially, as a consequence of declining demand for metals, the exports were reduced to 20% in November 2008 after five years of continuous economic growth. In November 2008, the capacity utilization of companies decreased by 60.2% compared with the third quarter

Petrit Pollozhani,* Luljeta Sadiku,** Blerta Demishai*** 143

of the same year as a result of falling foreign demand to 13.1% and domestic demand to 14.7%. Also, industrial production decreased for 8% in the last quarter of 2008. All these led to increased unemployment in the country, from 31.7% to 32.4% in the first quarter of 2009, and to 33.5% in the first quarter of 2010. It should be emphasized, that high unemployment in Macedonia is one of the most serious problems in the country.

The financial system in Macedonia is dominated by the banking sector, and it has the most important role in stabilizing the financial system as a whole. Unlike the real sector, which was affected by the global crisis, the financial system remained stable, and that, due to the traditional way of banking, low level exposure to international markets and foreign capital markets. Most of banks in Macedonia are owned by foreigners and are capitalized by the largest holder of host states, as it was the growth of capital of Stopanska Bank in October 2008 by the holder, the National Bank of Greece.

However, despite the stability of financial sector, in the last three quarters of 2009, it is seen a considerable change of commercial banks towards investment in treasury bills and significant decline in lending towards companies and citizens. The restrictive monetary policy of the National Bank of Republic of Macedonia influenced the increased deficit of the balance of payment of the country, to ’’tighten’’ even more the monetary policy through the basic rate of interest and increase of the compulsory reserves of the commercial banks. When basic rate of interest of NBRM reached 7%, the interest rate of commercial loans reached average rate of interest from 9-9,5%. In the conditions of significantly decreased incomes in the central budget, the Ministry of Finance on behalf of the Government of Republic of Macedonia announced the selling of state bonds on the “record” annual rate from 9% that forced NBRM to react with increase of the basic rate of interest of the treasury bills from 7% to 9.1%. This led to enormously increasing of interest rates for loans toward economy, in average from 11-13%, and for consumer loans of citizens from 13%-15%, which resulted in decreased consumption and investment.

These challenges that emerged as consequence of financial crisis imply the need for rapid response, innovative and resolutely through macroeconomic policies.

Therefore, the objectives of this paper are:

1. To examine the impact of the financial crisis on real output for Macedonia relative to some countries of South East Europe, by using the panel regression model,

2. To measure the effects of fiscal stimulus during the financial crisis in Macedonia, through functional econometric models, logarithmic models with binary variables (dummy).

2 The crisis response through fiscal policyThe US Congress in 2009 passed the American Recovery and Reinvestment Act,

which was authorized for spending $787 billion to promote job growth and increase


economic activity. Barro (2009) & Ramey (2009) in their empirical findings indicate such a government spending may actually decrease economic growth due to inefficient use of money. Barro (1991) analyzed 98 countries from dates: 1960-1985 by using cross-section time series and his results showed that public consumption (current) spending are inversely related to GDP growth. Also, public investments have no significant effect on growth. Thus different empirical evidences suggest controversy conclusions. Blenchard and Perotti (2002) empirically have analyzed the government expenditures, tax revenues, price level, consumption and output to see the impact that the fiscal policy has on GDP and on other macroeconomic variables. Their finding is confirmed with Keynesian approach of the economy for both shocks: an increase in public expenditure produces positive effects on GDP and an increase in taxation is followed by negative effects.

Macedonia’s government from the beginning was deployed to expansionary fiscal policy paradigm and the Keynesian approach, in order ’’compensation’’ the part of the demands for goods and services of Macedonian companies that are the main exporters, and in this way to improve the economic performance. For this reason, the government of Macedonia undertook four packages of measures. In November 2008, brought the first ’’package of anti crisis measures’’ composed of ten measures, in financial value of about 20 billion MKD or 330 million Euro.

The composition of this package was: Writing-off the outstanding current liabilities for health insurance, if in the next four years the companies regularly and on time pay the employee’s health insurance benefits, where the government budget from this measure waives 50 million Euros. Writing-off all accumulated interest payables on the liabilities for social care insurance benefits if the company pays the principal dept. The expected value from this measure was 165 million Euro, but in fact until 31.08.2009 are realized only 15 million Euro, which shows clearly that the effects of this measure are significantly below the projections. Thus, opportunity for the company for postponed payment to the main tax liability if the company secures the debt with banking guarantee of 100% or if the company offers mortgage with a value of 250% of the main liability, reduction of the custom taxes (for 498 items), lower personal incomes taxation rates for the individual farmers, transformation of the tax receivables of the government into a permanent share in some companies where the government is already the major shareholder/owner, reduction the Governmental New Year’s spending (2008).

The downside of these measures is that they are based on ’’fiscal forgiveness’’ rather than in direct injection of funds into the economy or in financial assistance through loans with favorable interest rates.

Due to the limited economic effects of these measures, the Government of Macedonia brought the second package of anti crisis measures, which was an Investment Program of the Macedonian Government, with duration of 8 years (2009-2016). This program included among others: road infrastructure projects, railroad infrastructure, sport infrastructure projects, energetic, water supply and sanitation etc., with planned funding sources from Budget of R.M., credits from European


Investment Banks, Word Bank and other financial institutions.

The second package of measures is characterized as package of measures that can be taken in normal conditions and do not have the character of anti-crisis measures. It is obvious that the possibilities for implementing such an expansive fiscal policy are constrained by limited fiscal space, and the structure of revenues and expenditures, by which such investments lead to significant increase of public debt for the next 8 years, so it is prescribed timing of realizations of such projects.

During the second quarter of 2009, the Government brought ’’third package’’ of anti crisis measures, consisted of 70 measures. These measures included: budget rebalance (reduction of expenditures of 137mil. Euro) and keeping the budget deficit of 2,8%, credit support for businesses from the European Investment Bank in the amount of 100 million Euro, measures to stimulate export, programs for co-financing, loan guarantees for long-term investments.

In terms of realization, was overdue realization of credit line, the delay in implementation of budget rebalance and shortfall of long-term loans in denars. The practice showed that this measure, also was accompanied with negative effects on the liquidity of companies.

The ’’fourth package’’ of anti crisis measures included 24 measures such as credit lines from the European Investment Bank and the European Bank (15mil. Euros) as well as an extension of time for collection VAT.

These measures are characterized as daily mass actions and without the component of risk and crisis.

In general viewpoint, there is a lack of cohesion and synergy of the competent institutions for the most vital macroeconomic policies in Macedonia, fiscal and monetary, the increased of interest rates in one side and the demand for liquidity in another side, generated negative effects by their non coordination. Therefore, the focus of this paper is to tackle these issues empirically. Although, there are a few studies investigating the effects of financial crisis, indeed most of them are descriptive and don’t use rigorous models of analysis. Also, researches focused on the effect of fiscal policy on economic growth are scarce.

3 Methodology and data

3.1 The fixed effects regression model

To examine the impact of the financial crisis in Macedonia relative to some countries in the region we use the panel regression by looking for the responsiveness of real output to main macroeconomic indicators. The regression model has the form:

Where Y represents the real output for country and time , X is a vector of


macroeconomic control variables that include investments to GDP, exports plus

imports to GDP, inflation, government expenditures, external debt and current account deficit to GDP. Whereas is an unobserved variable that varies from one country to the next but does not change over time. We want to estimate , the effect on Y of X holding constant the unobserved country characteristics Z. Because varies from one country to the next but is constant over time the real output regression model can be interpreted as having n intercepts, one for each country and is the stochastic term.

Specifically, let

Then the equation becomes:

This equation represents the fixed effects regression model by which we estimate the fixed effects on real output in two time periods, before and

in the period of crisis.

3.2 The logarithmic model

In order to measure empirically the effects of the anti-crisis measures we used the log-log model with dummy variables for the period of crisis, where we have analyzed the effects of the fiscal component, such as government expenditures of Macedonia. The regression model is:

And

Government expenditure is used as independent variable, in order to explore if the government stimulus had an impact on alleviation of the crisis or not and what effects had on real output. The variable Dcrisis represents a dummy variable that takes the value 1 during 2008-2010 and 0 otherwise.

3.3 The data

The data used in the empirical research for the first approach consists of an unbalanced panel of annual observations for the period 2000-2010 for 6 SEE’s economies (Albania, Bulgaria, Bosnia and Herzegovina, Croatia, Macedonia and Serbia) are taken from two main sources from World Bank database (WDI) and


EBRD database. As regards the second approach of the case of Macedonia for the logarithmic models the data are provided from State Statistical Office of Macedonia and Ministry of Finance, for the period 1996-2010.

4 Empirical findings

4.1 The fixed effects regression results

The empirical results indicate the following: ■ The investment to GDP has a positive impact but not statistically

significant in both periods (see the table below). Empirical evidence shows that the investments are slower in the periods of crisis.

■ Inflation is used to measure macroeconomic stability and it is negatively related with real GDP in the pre crisis period and statistically significant at 10% level, whereas it has a positive relationship in the period of crisis but not statistically significant.

■ The trade openness variable that include the export plus import to GDP ratio has a positive relationship and statistically significant before the crisis but a negative relationship in the period of crisis.

■ Government expenditures are positively related to real output in both periods and are statistically significant. Ram (1986) by analyzing a panel data of 115 countries concluded that increase in government expenditure will tend to have a positive effect on GDP growth.

■ The external debt has a negative relationship with real output in both periods but it is statistically insignificant.

■ The sign of current account is positive but statistically insignificant in the pre crisis period and negative in the period of crisis and insignificant as well.

Table 13.1 — Fixed effects estimation.

Dependent variable Real GDP

Years 2002-2007 Years 2008-2010

Coefficient P-value Coefficient P valueInvestment/GDP 0.0730172 0.214 0.0077124 0.297Inflation - 0.120886 0.078 0.0872428 0.141(Export +import)/GDP 0.1052375 0.048 -0.099096 0.038Government expenditures 0.04623778 0.028 0.03240081 0.106External debt/GDP -0.0338345 0.253 -0.1439107 0.501Current account/GDP 0.0307162 0.150 -0.0539971 0.613


Fixed effectsAlbania 8.880175 8.138737Bosnia & Herzegovina 5.170440 19.75487Bulgaria 5.873033 11.24465Macedonia 7.821514 9.639041Croatia 8.74430 32.22532Serbia 7.696940 14.33013R-Squared 0.6632 0.6013

SE of regression 0.252 1.785Mean dependent variable 9.883 1.641Sum of squared residuals 2.344 7. 236Durbin –Watson 2.109 3. 492

4.2 The logarithmic model estimates

The regression estimates of the log-log model that measures the elasticity of government expenditures are the following:

12.4

12.5

12.6

12.7

12.8

11 11.2 11.4 11.6 11.8logshpenztot

loggdpr Fitted values• loggdpr — Fitted values

Figure 13.1 — The effects of government expenditures to real GDP (Authors’ calculation).

The government expenditure variable is used as a fiscal indicator in order to analyze the effects of fiscal policy of Macedonia on the real economic activity. The results indicate that there is a positive relationship between government expenditures and the real output. Thus, if the government expenditures increase by 1% the real output will increase by 0.4%. The coefficient of the dummy variable that takes values 1 for the period of crisis is also positive and statistically significant. This means that the anti crisis measures undertaken by the government have done positive impact on crisis alleviation in Macedonia.


5 ConclusionsThe main objective of this paper was to assess the impact of the financial crisis

on real output of the Republic of Macedonia relative to some SEE countries as well as to investigate if the anti crisis measures were effective. The estimates indicate that the fixed effects are higher in the period of crisis rather than in the pre crisis period except Albania. Also from the log-log model we can conclude that the fiscal stimulus has given positive effects on crisis alleviation in the Republic of Macedonia.

6 ReferencesAlesina A., Ardagana S., Perotti R. & Shiantarelli F., ‘Fiscal Policy Profits and

Investment’, American Economic Review, No. 92.

Blanchard O. J. and Perotti, R.(2002), ‘An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output’, Quarterly Journal of Economics, No. 117.

Bexheti. A (2010), ‘Anti-Crisis Measures in the Republic of Macedonia and their Effects-Are they Sufficient?’ Working Paper No. 70, Bamberg Economic Research Group on Government and Growth, Bamberg University.

Disyatat P. (2001), ‘Currency Crises and the Real Economy: The Role of Banks.’ IMF, Working Paper No. 01/49, Internationally Monetary Fund.

IMF(2009), ‘Executive Board Conclues 2009 Article IV Consultation with Republic of Macedonia’, Public Information Notice (PIN) No 09/140; (http://www.imf.org/external/np/sec/pn/2009/pn09140.htm);

Mishkin Frederic S. (1996), ‘Understanding Financial Crises: A Developing Country Perspective’, Annual World Bank Conference on Development Economics, World Bank, Washington D.C.

NBRM (2004-2009), Annual Report, Published March –April 2005-2010.

Nenovski T. & Makrevska E.(2009), ‘Influence of the Economic Crisis on the Exchange Rates of the Countries from Eastern and Central Europe’, University American College, Fourth Annual International Conference on Europe: Europe in Crisis: Threats and Opportunities, Skopje 2009.

Uruҫi E. & Boriҫ A. (2009), ‘The Financial Crisis, Its Dimensions and Consequences in the World and the Albanian Economy’, Epoka University, Second International Conference on European Studies: Political, Economic and Social Challenges of the Balkan Countries in the Process of European Integration.

RISK

OBJECTIVE

MA

NA

GE

Public debt and the challenges of its administration in our country

Aurora Hoxha,* Ines Dika**

Lecturer, Agricultural University of Tirana, Faculty of Economics and Agribusiness*Msc, @: [email protected]

**PhD., @: [email protected]

AbstractPublic Debt (also known as Government Debt) is considered a key element as

well as an integral part of the macroeconomic development, which includes the stabilization of loans, payments of the debt service and its final repayment. All these serve the purpose of promoting economic growth, the reduction of poverty and a stable economic development. It represents a mean, which if used properly and efficiently gives a positive incentive to the economic growth. In case it is used improperly it might go so far as to bring the country to the limits of a financial crisis.

Is the present level of Government Debt in Albania problematic or not? Does the service of Public Debt present threat, considering the financial crisis of the year 2007-2008 which we are still undergoing? This paper seeks to answer these questions as well as other questions related to the challenge of the administration of Public Debt.

This paper will be written in the form of an analysis for the economic stability,


public debt as well as the determinants of the government borrowing, giving the respective conclusions and recommendations in the end.

It will also present the time structure of the debt, the minimization of the debt’s cost and the techniques of identification, measurement as well as the control risks of Government Debt. To enable the presentation of a clear panorama of the situation of Public Debt, as well as its performance in the future, in parallel with the qualitative evaluations, a considerable part of the material consists of ascertainment and quantitative analysis. Thus from our point of view the indices of the deficit as well as of the debt, are an essential index of the limits that a government, already member of International Institutions such as IMF, the World Bank, also aspiring to join the EU, might keep the budget deficit and its monetization.

Key words: Public Debt, budget deficit, government borrowing, cost of debt.

1 IntroductionPublic Debt (also known as Government Debt) is considered a key element as

well as an integral part of the macroeconomic development, which includes the stabilization of loans, payments of the debt service and its final repayment. All these serve the purpose of promoting economic growth, the reduction of poverty and a stable economic development. It represents a mean, which if used properly and efficiently gives a positive incentive to economic growth. In case it is used improperly it might go so far as to bring the country to the limits of a financial crisis. Public Debt or national debt is the debt owned by a state or a government (at central or local level) at a given time, and generally represents budget deficit accumulated and financed through borrowing.

Budget deficit in governmental accounting is a financial state according to which government receipts and expenses are much higher than its incomes. This difference is mainly financed by the public through investment in different debt instruments that the government issues such as: treasury bills, government bonds etc. Both above mentioned indices have a cause and effect relation, because budget deficit is financed by debt and on the other hand, the debt itself includes costs that become a burden for the next governmental expenses, thus becoming an influencing factor on the deficit. As far as political views are concerned, the reduction of the budget deficit by commitment for reductions of governmental spending and the reduction of public debt by strategies of increasing its efficiency make up the essence of marketing for ”good governing”. However this is actually a chronic concern whose consequences become present in case of a crisis, as we are now. From our point of view, deficit and debt indices, in essence are the limits to what levels should a government keep its budget deficit and the level of its liquidity, especially a government which is a member of the International Institutions such as: IMF, World Bank, etc, aspiring to join the EU. Is the present level of Government Debt in Albania problematic or not? Does the service of Public Debt present threat, considering the financial crisis of the year 2007-

Aurora Hoxha,* Ines Dika** 153

2008 which we are still undergoing? This paper seeks to answer these questions as well as other questions related to the challenge of a good administration of Public Debt.

This paper will be written in the form of an analysis giving the respective conclusions and recommendations in the end. To enable the presentation of a clear panorama of the situation of Public Debt, as well as its performance in the future, in parallel with the qualitative evaluations, a considerable part of the material consists of ascertainment and quantitative analysis. In order to better fulfil the requirements of a case study the paper includes different materials from the Ministry of Finance, Bank of Albania, the World Bank and IMF.

2 Critical dependency of the budget deficit and public debt

The relation cause- effect between deficit-debt is one of the most observed directions for the performance of a Government, be that involved in business cycles with normal performance, or in other cyclic more sensitive stages that convey crises. Specifically the principal directions of more importance in the scale of functional dependency among budget deficit, debt and the borrowing capacity of the government influence these trends of concern:

■ the increase of the debt as a result of covering the increase of budget deficit is done with the argument that the addition of expenses will influence the increase of GDP and the increase of GDP with a constant level of taxes will increase the government’s cashing to serve debt settlement without a problem. The most important recommended indicator is marginal analysis of the debt according to the basic ratio: ∆Debt/∆Net Income

If this ratio increases progressively then the rational decision to increase governmental borrowing faces the challenge of insecurity to increase income. In short term the increasing influence of the GDP comes because of the component G (governmental expenses), but on the other hand the deficit is deteriorated (G-Tx), thus creating a vicious circle to find the solution in re-borrowing until the borrowing capacity is over, causing a crisis which goes beyond governmental context by creating a more problematic stage of risk for the country.

■ The above mentioned problem increases the burden of the debt or the debt burden, the sacrifice that the citizens of a country need to go through to face public debt repayment. This incites the government to sell its assets through privatization tenders when cash from these privatizations refill the financial vacuums created by the debt.

■ Considering countries of emerging economies which are out of the Euro zone area, like Albania, the problem also lies in the preservation of the


purchasing power of the national currency, thus the Lek. The increase of the budget deficit, because of the increase of the expenses or the decrease of the taxes, increases fractionation of the currency in circulation. On the other hand any additional unit of deficit monetization with debt, increases the monetary unit together with the risk of a moral setting for the Bank of Albania, as a failure to achieve its mission on price stability, thus going out of the critical control of inflation.

■ The problem of debt service or interest payments. Considering the fact that the Albanian government is a borrower, its behaviour tends to increase the prim of inflation to reduce the cost of repayment through reduction of the real interest rate. From the economic viewpoint interest payments under the conditions of inflation are considered as repayment of the principal amount of debt1. For this reason, defining the real rate of repayment requires correction of the inflation rate. This means that the borrowing investors “pay” the government by cashing money in a reduced purchasing power, creating losses.

■ The last source of repayment on behalf of the government is the alternative of tax increase, meaning that the public as an investor/financer of the debt learns to perceive what is known as Richard’s equivalence. The Albanian economy must pass from borrowing for financing consumption to an extension of the increasing resources, improvement of competitiveness and increase of exports. This requires continuous improvement of the business climate as well as the support of the investors“2. As far as the above mentioned points are concerned, structural indices of the debt include the following main concerns:

Firstly: there is a high risk of liquidity, because the government keeps a high burden of the short term debt, what is more an increasing one (+1%) and a low burden of the long term debt.

Secondly: because the short term debt has the highest burden, this means that our economy is not being restructured towards investments. The fact that 60% of the debt is completely financed by the banking system, where only a Bank like Raiffeisen has more than 34,5% of the debt’s financing, shows a high stage of concentration and dependency. Thus the portfolio of the assets of the RBAL tends towards investment without credit risk, but with the risk of inflation. This means that on one hand the government has a high dependency on only one bank, but on the other hand RBAL is exposed for more than 40% of the portfolio under titles free of risk with an average efficiency of about 8%. In real terms this means that when inflation tends to be near 8%, it creates an economic benefit almost zero per RBAL.

Thirdly: the structure of the debt creates a high opportunity cost. The government is considered to be the biggest borrower of the banking system and it finances 60%

1 Alen S. Blinder, William J. Baumol ‘Economics’ 2008 Harcourt Brace Jovanovich.2 Citated from Bank of Albania report.


of its debt. This means that the banks wear away their monetary unit giving it as debt to the government to the amount that the available funds are reduced to lend them to the economy, thus to credit private business. The conflict is seen in response to the question whether the economy or the government is a more efficient user of credit banking?

Fourthly: Banks risk to create a moral hazard for the fact they tend to lend nominally to the government under the cost of not lending to the public. Because a low availability of funds remains to the bank, the level of risk concentration per unit of a given loan is increased, which increases the cost of credit in the economy overall. The differential of the interest rate in loan per economy is twice higher than that of the loan to the government.

Fifthly: An optimal decision of the banks to choose investment on treasury bills is a signal of liquidity crisis, for the fact that banks accept missing earnings (additional opportunity costs) only for the sake of possessing the most possible instruments with high liquidity, such as with the treasury bills.

Sixthly: the most negative phenomenon that has emerged is the fact that while the banks have reduced the burden to government crediting, non-banking institutions as well as the individuals have increased this burden with (+2%). This removes the risk burden towards the most vulnerable part of the economic structure.

Finally, the whole cost of this debt has a rational tendency to face the increase of the taxes, or the decrease of governmental expenses. The latter being considered as a short term alternative, but in the medium term period the burden of the debt requires the indispensability of tax increase. This will create a cyclicality that will create a burden upon the businesses, the public once more.

3 Improvement of the quality of government borrowing and exposure to risk

While continuing the above mentioned issues we have to take into consideration the fact that budget deficit is financed in any case. The problem lies on how budget deficit quality is and whether the government lends by issuing debt instruments of the money market (short term borrowing, through issuing treasury bills) or the market of capitals (long term borrowing, through issuing bonds).

From our analysis it results that:

1. If the economy is expected to have a lower level of the savings aggregate and a higher level of government borrowing, then the price of loans for private businesses will increase, so interest rates are increased and the phenomenon of crowding out investments in the private sector will emerge. This kind of situation is found in facilitating fiscal policies before expansionism, where the increase of expenses, deficit and borrowing of


the government does not lead to an increase of the aggregate of demand (output). Although an expansionist fiscal policy in increasing deficit and debt for governmental expenses at first sight should influence the increase of the aggregate for the requirement for goods, money (GDP increase) which on its behalf incites output. We are currently at a situation when the increase of the expenses of the government is compensated the same even by the adverse impact of the decrease of exports and expenses that the private sector has for investments, by exports and expenses that the private sector does for investment, smoothing the influence of the increase of governmental expenses in the aggregate of demand (output). The most obvious risk is related to the fact that the influence of budget deficit and public debt are read as discouraging for investments and retarding for the increase of national capital, which is easily noticed even in both latest reports of Bank of Albania which calls for the banks to increase crediting in the economy, while crediting in the economy has a high interest rate for two main reasons: (a) the increase of costs when there is lack of liquidity, on the part of deposits and lack of credit cash; (b) the increase of the inflation risk. The increase of the interest rate delays investments and their delay decelerates output increase, decreases supply aggregate and consequently the result is a lower potential level of the Gross National Product (GNP). A deeper analysis arguments that if the increase of government investments incites the private sector not to invest, then this sector does not invest money on the financial market, they retreat by the market even the ones they have which is otherwise called “crowding out”.

2. A high government borrowing in the long term performance will impose an increase of the burden of the taxes, which on its own will target the aggregate of demand and will impinge economic growth. In our conditions when currently our business cyclicality tends towards recession, this will influence the increase of the taxes, the increase of the burden of the taxes, fiscal evasion as well as the behaviour of firms to fiscal evasion. Under these circumstances the elements of the cost risks for the government appear even as international crowding out. By specifically analyzing the budget structure into internal and external debt, short term and long term, in concessional and non-concessional debt, in a debt with fixed or variable interest rates, etc it results that Albania has considerably serious challenges for the expected impact.

Firstly, according to the economic and financial programme of Albania for the upcoming years, repayment of the loan taken from the crisis of the recent years, as well as the common interests of the existing debts, will require a general amount of money of 90.4 billion Leks, or about 700 million Euros based on the current rate. From these 32.7 billion Leks or 250 million Euros, will have to be paid as principal and interests for the loan taken for the Durrës-Kukës highway.

Secondly, the portfolio of the government’s debt tends towards a high risk


composition. We saw short term domestic borrowing and foreign currency borrowing has a resultant influence that lead to:

Analysis based on simulations cost/risk. Based on this analysis we notice that the structural factors that increase risk include:

■ The increase of the external non concessional debt, the increase of the debt in Euro, exposure to risk of the exchange rate as well as the risk of non creating refinancing power of the internal debt.

■ Anticipation for avoidance of a financial blow, because a high risk of refinancing might create premises for systemic risk.

■ Because the major part of the debt consists of the internal short term debt exposed to the changes of the interest rates, or to the external debt exposed to changes in the exchange rate, the existing risks of the debt are considerably high. This might cause great fluctuations in the debt services.

The attempt to issue Eurobonds is still under way. On the other hand the amount of 700 million Euros creates difficulties for the budget. The challenge is twofold:

■ Response of the international financial market, so if the government is able to attract purchasers for the Eurobonds it aims to issue;

■ The role of the Central Bank to preserve sustainability and stability of the currency Lek.

Thirdly, in case the government will have no money to repay the debt in 2012, according to the contract, interests will increase and the deadline will be extend for two more years. The common solution in such a case remains the “programme of structural regulations” through the International Monetary Fund. IMF on its own will recall on the above directions that impose a stabilizing program, shortly the final stage of the fiscal expansion policy. This is the beginning of a solution between two pillars of the economic, fiscal and monetary policy.

4 Suppositions of the strategy for 2010-2014The debt management strategy must be based on the evaluation of the expected

costs and the risk characteristics of different possible loan strategies. The General Directory of Debt Management has thus developed a model for the medium term debt strategy following the general concepts of the MTDS model of the World Bank. The model allows for different loan strategies, exposing them to several fiscal and macroeconomic shocks and by measuring costs and risks related to the strategies as well as with the debt reports of GDP. The MTDS model specifies as follows:

■ The data are based on a trimester period from 2010-2014. ■ The debt data and the current guarantees used for MTDS for repayments


and fixed interest payments are exposed by DMFAS (external debt) and from excel for internal debt.

■ Projected disbursements of the debt and the guarantees for their repayment, as well as fixed interest payments have been exported to MTDS.

■ The variable interests in the current debt and guarantees have been calculated by MTDS.

■ Loan simulations have been based on the evaluation of the loan requirements in the medium term budget.

■ MTDS allows simulation in the internal instruments as well as for financing projects in Euro by having fixed or variable interest rates and in Eurobonds in Euro by having simulations with different maturities.

■ MTDS calculates repayments and interest payments for the simulated loan as well as the total debt (including the current debt)

■ For each borrowing strategy, MTDS calculates the expected cost (interest payments + reassessment of the exchange rate) and risk (deviations from expected income)

■ Reassessment of the exchange rate calculated based on cost, i.e. when there are changes in the exchange rate, which influences the total debt of the respective currency.

■ Despite the costs and risk or any borrowing strategy, MTDS also calculates the matured related risks for each year during the whole period of simulation. ▪ The debt/GDP for the debt which includes and excludes the guarantees ▪ Percentage between the internal/ external debt ▪ Duration ▪ Risk of refinancing

The strategy has been based on the macroeconomic and fiscal predictions presented at the review of the macro framework for the years 2010-2013, realized in January 20103. Projections for the other years were added based on their trends thus allowing a perspective at a medium term period.

The exchange rate norm and the internal interest norm are supposed to remain unchangeable during this period. The short term interest norms at the international market are supposed to be increased gradually from the lowest existing level to a normal level of 4-5%, whereas the long term norms of interest in the international market are supposed to be increased slightly approximately up to 1% for all the period. The fixed interest norm for disbursement in loans for projects is expected to be increased up to 4-5%. The interest norm for external commercial borrowing is

3 It refers to a macro framework reviewed in Januar y 2010.


expected to be about 7-8%.

Stress scenarios

Based on a stress scenario it is supposed that the nominal increase of the GDP is 4% for the period from 2010 to 2014, the fiscal balance sheet is deteriorated with more than 5% of the GDP, the exchange rate of Lek is subject to a depreciation of 30% as compared to all the other currencies, interest rate norms for the short term internal debt are subject to a shock, thus a shock of about 400 points in percentage. The interest rate norms in the international market, including the interest rate norms of the external commercial debt offered to the government, are not presupposed to change compared to the base scenario.

4.1 Sensitivity of macroeconomic and fiscal developments

According to the simulations, the ratio debt/GDP will reduce to 54% at the end of 2013. The state guarantees will reduce from 4% of the GDP to about 2.8% at the end of this period as a resulting of non issuing guarantees any more, despite the guarantees in 2010. The development of the ratio debt/GDP is generally the result of the existing debt performance, the primary balance sheet as well as the GDP. The simulated developments of the debt GDP show a reduction of the debt during the period. However if the macro and fiscal developments follow a route which is not favoured in the upcoming years, progress of the ratio debt/GDP might increase fast. In the test scenario it can be noticed that the ratio of the debt to GDP is calculated at about 120%. This scenario shows how sensitive the ratio debt /GDP is to the macroeconomic and fiscal developments of the country. Just like in the base scenario this progress is similar to all the strategies.

Strategy 1. Short term domestic debt

This strategy is focused on short term domestic loan, including borrowing at variable interests, completed with financing of projects which have variable interest rates. As a result the risk of domestic refinancing as an amount of the debt being matured and being subject to fixed interests within 12 months, would increase further at high levels. The index of domestic debt “duration” will reduce to approximately 0.5 years and the total debt will reduce to further more than a year and six months. The tendency for reduction of the amount in Lek of the debt is the result of the fact that during the years 2010-2011 all the increases in capital expenses have been financed through loans of foreign projects bilateral or multilateral creditors, as this will assure the most efficient financial sources for the government. The expected cost for this strategy is the result of a supposition of a domestic interest rate not variable over the period of time with a considerable spread of 4.5% ranging from the shortest to the longest maturations. However within a stress scenario, interest payments over the whole period might increase with more than 50%, by expressing the risk of interest in the budget’s portfolio.


Table 14.1 — Costs and risks for the simulated periodIn billion leks Increase in %

Base scenarioInterest payments 256,5Stress scenarioIncrease in interest payments 133,3 52,0Effects by the exchange rate 74,7out of which, realised: 19,7

Strategy 2. Long term domestic debt

This strategy focuses on domestic borrowing through fixed liabilities filled in by financing the projects with fixed interest rates. This strategy includes long term duration, but to a certain extent not realistic, as long as domestic market currently does not allow the absorption of this amount of long term borrowing. Compared to the option of short term borrowing this strategy includes a considerable reduction of the risk of domestic refinancing as well as a considerable increase of the duration of the total debt and the domestic one. The expected costs for this strategy are higher than those of the short term domestic debt, because of the not variable suppositions and the high interest rate of the long term domestic debt. However the risk measured in interest payments for the stress scenario, is expected to be low, about 30% compared to about 50% in the short term debt scenario.

Table 14.2 — Costs and risks for the simulated period.In billion leks Increase in %

Base scenarioInterest payments 290,2Stress scenarioIncreasein interest payments 91,7 31,6Effects by the exchange rate 74,7out of which, realised: 19,7

Strategy 3. Short term external debt

In this strategy a considerable part of the borrowing requirements is financed through commercial borrowing in the foreign market (300 billion Euros per year), completed with domestic borrowing and the expected financing of projects. Borrowing has a short duration. As far as the above mentioned is concerned, the part of the debt in the domestic currency is reduced considerably, but because of the great continuous stock of the short term domestic debt, the risk of domestic refinancing increases during the period of simulation. Duration for the domestic debt and the total debt is subject to reduction.

This strategy insures lower expected cost, because of the relatively favourable


interest rates of external commercial borrowing compared to the interest rates of the domestic market. However, because of the short term focus, the risk of interest rates is high, 47.1% and in addition to that the risk of the exchange rate is considerably higher than the other two borrowing options.

Table 14.3 — Costs and risks for the simulated period In billion leks Increase in %


Strategy 4. Long term external debt

This is a similar strategy to the previous one, but borrowing has a longer duration all over the markets, consequently it reduces the risk of refinancing. At the same time it has a considerable risk of the exchange rate. In this strategy the external commercial borrowing primarily leads to a reduction of the stock of the short term domestic debt while even domestic financing in the liabilities market is reduced. Consequently, the risk of domestic refinancing has been reduced gradually, while the duration of the domestic debt and that of the total has been increased. The expected cost of this scenario as well as the risk of the exchange rate are relatively higher, bur interest risk is low, 33.5%. This option is presented efficiently at cost and it is more realistic compared to the other long term options, which are entirely focused on long term domestic borrowing.

Table 14.4 — Costs and risks for the simulated period.In billion leks Increase in %


5 Conclusions and recommendations ■ Public borrowing serves as a bridge between income and expenses. The

portfolio of public debt is built based on the combination of different financial instruments in long terms and short terms, with fixed and variable interest rates.


■ The debt is a contractual liability which must be paid with interest as defined in the terms of Credit Agreement, which is a legal document.

■ Borrowing procedures must be used efficiently and effectively to make sure that the increase of service liabilities of the debt does not damage the finances of the state.

■ The establishment of a legal environment to contract domestic and external borrowing, as well as the issue of guarantees, is an indispensable step for the successful management of the budget.

■ The objective of debt management is the design and implementation of a strategy for debt management, which corresponds in time with the necessary financial indices in order to implement the budget efficiently.

■ The role of public debt strategy which is mainly oriented towards the increase of the maturation terms, the gradual increase of liquidity especially of the external debt by tempting to avoid the concessional terms of the official creditors and at an optimal composition of the currency of the external debt, enables the debt management to have sustainable objectives as far terms are concerned.

■ Problems which public debt management faces will be listed below: the lack of a secondary market i.e. that of the capital a considerable amount of the debt is withheld by the second tier banks, as well as the low level of borrowing by the public.

■ In the meantime some of the precautions that will influence the reduction of risks that accompany the debt will be: 1.Diversification of the financing instruments, 2. Strengthening of the strategic debt management, 3. Extension of the maturation period, 4. The establishment of a proper structure for the currencies in which external debt is kept.

6 LiteratureAndritzky, Jochen −’Sovereign Default Risk Valuation: Implications of Debt Crises and

Bond Restructurings (Lecture Notes in Economics and Mathematical Systems)’, Springer-Verlag Berlin Heidelberg 2006.

Brixi P. Hana, Schick Allen − ‘Government at Risk: Contingent Liabilities and Fiscal Risk’, World Bank 2009.

Carlberg, Michael –‘Monetary and Fiscal Strategies in the World Economy’, Springer-Verlag Berlin Heidelberg 2010.

Pugel, A. Thomas –‘International Economics’, MacGrawHill 2009

Temel W. Judy −’The Fundamentals of Municipal Bonds’, John Wiley & Sons 2001


Online source. Bank of Albania: www.bankofalbania.org

Online source. IMF: www.imf.org.

Online source. OECD: www.oecd.org.

Online source. Link: www.unctad.org.

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Audit problems of information system in public administration

Gerta Gogo,* Dori Risilia,** Ina Pagria***

Agricultural University of Tirana, Faculty of Economy & Agribusiness*MSc. @: [email protected]

**PhD. @: [email protected]***PhD. @: [email protected]

AbstractCurrently all audit institutions use computer systems for daily operations of the

work to prepare and conduct the audit as well as analyzing and processing of audit data. Nowadays more and more there is a tendency of electronization of information systems, and normally that our country could be out of this necessary development. The only problem associated with this development is always security of these systems. We are very focused on this part of the problem. Audit of information systems is a subject still little widespread in our environment. And if we talk about the audit of information systems in public administration problems are even greater. The aim has been to describe and present this problem if such appears and if it is necessary to be or not upgrade. Many times we had theoccasion to deal with tax authorities and their information system and will be important to know what will be the role of the state supreme audit to audit these systems.

Answering the questions how protected are the tax authorities from


confidentionality, how protected are businesses from confidentiality, and other questions will find space and expansion with the development of this paper. We wanted to look at other information systems used by public administration as safe and protected is it, how qualified are the auditors, and how much is the cost of training. We think that some of these questions has been answered even this is a new area and the situation is still problematic. The method chosen was the first gathering of information from a number of reports presenting the use of existing information and communication technologies in Bangladesh. Secondly, selected specialists contributed their knowledge of various fields to meet the information for this report.

Electronic readiness means the current level of usage of information society technologies in the country, and the capacity or willingness of the country for the introduction of these technologies. To evaluate the electronic readiness as a rule there are made two types of evaluation: qualitative assessments (historical analysis, best practices), and quantitative assessments (questionnaires, statistical methods).

These two types of electronic readiness assessments, in the true sense of the word, there are never made in Albania. There are a number of reports addressing this issue, so there is nevertheless a reflection of the readiness of Albania, but without filling out quantitatively. Through this paper we aim to present the situation and give our recommendations for further improvement of this part of the broad spectrum of auditing. The information needed for this project was obtained from various statistical publications, articles, studies of experts in the field of finance ministry publications. Also in the conclusions are focused on recommendations for further improvement of these systems in order to walk into the desired shape and be in the order of their users.

Key words: auditing, information systems, electronic readinesses.

1 IntroductionAudit of information security is a vital part of any information technology audit

and often is understood to be the primary purpose of an information technology audit. The full purpose of information security audit includes topics such as data center (physical security of data center and logical security of databases, servers and network components of infrastructure), network and application security. As many technical areas these issues are always in development, auditor of information’s technology must continually develop their knowledge and understand the system and environment and tracking system. To support the increasing of technical requirements for auditors to operate in the field of information technology, a training and certification have been developed over the years. Currently the biggest certifiers recognized in the field are the Institute of External Auditors (IEA) SANS Institute (specified, specific branch of auditors and SANS GIAC) and ISACA. As in all countries of the East in Albania audit is represented to some extent by economic and financial control organized almost in all public subjects.

Gerta Gogo,* Dori Risilia,** Ina Pagria*** 167

The concept of information technology audit was formed in mid 1960. Since that time, the audit of the Information technology has passed through many changes, dedicated to changes in technology and the inclusion of technology in business. The first projects of the Information and Communication Technologies have launched the 70-years and had to do mainly with the application of mathematical methods. Requirements and increased gradually to 80-years in the country began to enter the first micro-computers.

A more qualitative step was conducted in the mid 80’s with the creation of metropolitan network (urban) in the city of Tirana, funded by UNDP. This network operated until before 90’s, when as a result of major changes that occurred in the country and the financial difficulties to pursue technological development, the network was abandoned. But during 90’s in the framework of European Commission programs as TEMPUS, etc funds were provided for training in information techkology, equipment and literature, however, not all universities were able to use the opportunities offered by TEMPUS program. Also the Soros Foundation and Phare program contributed to the development of information technology with funds for the projects. There are no comprehensive statistics on information technologies projects in Albania and it is difficult to collect data for such projects. Given that there is no strategy for information technologies, projects are not coordinated and address only short-term needs and do not have a wide impact. Often projects are not managed properly, and not by people who have the appropriate qualifications and have brought the latest technology.

2 ObjectivesThe main objectives of this paper are:

■ To support the increasie of technical requirements for auditors. ■ To evaluate the audit process ■ Describe the system of information technology ■ Examine the problems in auditing the information technology that

public administration has

3 Procedure

3.1 Audit, the process of information technology

Internal controls are those mechanisms that ensure the proper functioning of the processes within an organization. Every system and process within an organization exists because of the specific goals of the organization. Each audit should look for the existence of problems or risks in these goals and ensure that internal controls exist in


order to reduce these risks.

Controls can be preventive, detection and correction and can be implemented at the administrative, technical and phisical levels.

Preventive controls control the non happening of the problems. For example request for password is an estimator tool in accessing the system.

Detection controls, register a problem after it occurred. For example the maintenance of activities brands is one of these controls.

Corrective controls are located between preventive and detection controls. They provide a systematic way of detecting when something has happened and changes the situation of the system by correct it.

What can we audit?

It is important to have an important planing for an information technology audit to focus on areas that are most at risk and those areas where we can provide the best expertise.

The first step to ensure a more effective audit process is the definition of community that can be audited. The main part of this community is the focused information technology functions. It is advisable to determine which are the information technology functions that are performed in order to focus and put them in a list as possible audit areas. The rest of the functions can be classified as distributed. This process relates to dissemintate information technolgy functions in various areas of the organization. Rating of all this universe of possible areas to be audited by an information technology methodology allows us to plan the audit process. In general we can present some criteria to rank the areas of audit process.

■ Problems in one area. If we have problems in one area then it is advisable to audit that area.

■ Risk assessment in the area. Assessment according the areas with tendency to have problems.

■ Benefit form the audit process in an area ■ Requests from management. Requirements of the information

technology manager. Specific requirements of information technology managers affect the ranking of priorities in the audit process. After we determine the set of fields where you can audit and after we ordered elements of the community as a priority list, we need to determine the human resources required for each potential audit process. In the end we need to plan the audit process.

An audit process passes through six key stages ■ Planning ■ Fieldwork and Documentation


■ Detection of problems and their evaluation ■ Development of solutions ■ Preparation of report ■ Problem Tracking

Planning

The purpose of the planning process is to define objectives and areas of audit. We can mention some basic resources that help us in planning the audit process; Prior expertise. Relates to previous understanding what information technology audit will require. The goal is to understand the process layers or the zone that wil be audited.

Standard test procedure. Dealing with standard work procedures for different areas of information technology auditing.

Fieldwork and Documentation

During this phase the audit team collects data and conducts interviews that will help information technology audit to determine potential risks and which of them shall be reduced accordingly. An important place in this phase occupies documentation as an important part to the inherent conclusions.

Detection of problems and their evaluation

During the audit process it is created a list of potential problems, which it remains one of the most important stages.

Continuing the evaluation process audit information technology has raised a problem, it is important to assess the degree of importance of the problem whether or not included in the final report is important here to find appropriate solutions.

Development of solutions

Once we determine the potential problems that we encountered in the audit area and have evaluated the facts and risks, we have to work together with the audit client to determine and plan solutions that address each problem detected.

In finding solutions should be determined the responsibility for execution of the action plan and time in which should finish. In finding solutions taking present that not always risk reduction is 100% effective related to costs, compared to the costs of risk reduction of 80%.

Preparation of report

There are several formats of a report where the main elements are for the purpose of the audit assessment, an abstract summary of the audit process and a list of problems associated with their respective solutions.

Problem Tracking

An audit process can not be considered fully complete if we find problems, we find solutions and we address them in the structures responsible person or organization,


if you have not control the process until completion of the action plan to minimize these problems. Information technology auditors are responsible together with information technology to achieve timely resolution of any particular problem. This cooperation is extended in time to see if the way of solving the problem is giving the right expectations.

3.2 Types of information technology auditing

Various authorities have created taxonomies to distinguish different types of information technology audit. Goodman & Lawless claim that there are three specific systematic way to care for the information technology audit.

—The process of technological innovation audit.The purpose of this audit is to build a risk profile for existing and new projects. The auditor will assess the breadth and depth of experience of the company in its technological choices, as well as presence in related markets, the organization of each project and the part of industry structure that goes with this project or product, organization and industry structure.

—Audit of Development Comparison. This audit as tells also the name understands the behavior of an analysis by the ability to change the company being audited compared to its competitors. This requires examination of the company’s research and development equipment as enrollment in the manufacture of new products.

—Technological position audit: This audit reviews the technologies that business currently has and who need to increase. Technologies are characterized as something “the base”, “the key”. Others describe the spectrum of information technology audit of five categories:

■ Application and system: An auditor should verify that systems and applications are appropriate, efficient, adequately and controlled to ensure valid data entry, reliable and timely data, and to realize the product and processing at all system activity’s level.

■ Processing of equipment information: An audit should verify that the processing equipment is checked to ensure timely processing and of applications and efficiency under normal and potential conditions.

■ Systems development: An auditor should verify that the system under development achieves the objectives of the organization and ensure that systems are developed in accordance with generally accepted standards.

■ Management of information technology and enterprises architecture: An auditor should verify that the management of information technology has developed an organizational structure and procedures to ensure a controlled and efficient environment for information processing.

■ Client /Server, Telecommunications, intranet and extranet: an auditor should verify that controls are ok with the client (computer receiving services) networks servers and connecting the client with servers.


An information technology audit should not be confused with an audit of financial statements. While there may be similarities, primary purpose of financial audit is to assess whether an organization is based on standard accounting practices. The primary function of an information technology auditor is to evaluate the efficiency and security of the protocol, particularly to assess the organization’s ability to protect information assets and properly distributing information to interested parties. Information technology auditor’s work can be summarized with the following questions:

Should be avaiable the computer systems for business computers to the required time? (Availability)

Does the information in the system will be open only to authorized users? (Confidentiality)

Will be the provided information by the system always accurate, reliable and timely? (Integrity)

Information technology audit focuses on determining risks that are relevant for information assets and access control in order to reduce those risks. Implementing risk control effect can be minimized but cannot completely eliminate all risks.

4 Results

4.1 Problems for the use of the information technology in the public administration

It is noted that the Albanian public administration in general has no complex applications and institutional use of information technology for research.Information technology for research are used as separate instruments to perform daily, not as cohesive institutional information systems.

Difficulties that public administration is facing

There are a number of issues that departments of information technology for research consider as obstacles:

Lack of proper legislation in relation to information technology for research

Lack of standarts

Low levels od skills in specialized areas through sensitive information technologies for research, such as security systems of crisis and to come out from crisis.

The lack of a stable job market for professionals.

Lack of cordination in the field of information technology for research .


Lack of a national strategy for information technologies for research, as a very important document which will also have an impact on how information technologies for research departments will operate in the future.

Low levels of schooling and university education levels and lack of ongoing training programs in new developments.

It is noted that most of goverment indtitutions use computers for text processing, personal data processing and exchange messages and practices between different offices.

Institutional use of information technologies for research as a rule is overestimated be the staff, probaly due to lack of the knowledge concepts to understand the differences between individual and institutional use of information technologies for research.

Using institutional applications and integrating them into the country will dramatically improve the efficiency of public administration. Information technologies for research could be used for the preparation of the content of procedures necessary for the public administration. For this purpose, the installation of information technologies for research should be seen as undivided part of processes of creating institution and administrative reform.

Also, installation of information technologies for research and expanding their applications should be decentralized. But in order to ensure the integration of separate infrastructures, it should be prepared and implemented by the central levels those technical terms that will enable interconnection and communication between them.

As a prerequisite for normal use of institutional applications, special attention should be devoted to funding the digitization of existing data in public administration. In contrast, new applications, however excellent they are, may fail if they will be used in parallel with the old ways and work style based on “paper”. Especially in the field of Internet use, different numbers are given in reports that are used to prepare this document. Without returning to the sources of used reports, should not be able to explain clearly the changes.

Local Registers of Internet that offer their services in Albania are: AT& T Internet services, registry based in the EU; Teleglobe International Cooperation, registry based in the EU; New Skies Satellites, registry based in the Netherlands; ABCom Albania, ISP national; Consultix GmbH, Germany-based registry; CabinetOy, based registry in the United Kingdom, and the Holy See - the city-state, etc.

It seems that there is only one Albanian company, ABCom Albania, which serves as the local Internet registry.http://www.ripe.net/statistics/hostcount/2002/08/al/hosts.cmp.html.

Free use of the Internet was provided after the Ministry of Public Economy and Privatization ended the state monopoly on communication and after parliament passed a law to establish ERT in February of 1998.

One difficulty with using the internet in the country is the registration of the


domain names. It is very difficult to register a domain name directly in the “AL”. From 19 registered domains in the domain “AL” 6 of them are mainly sub-domains (com.al; edu.al; gov.al; mil.al;net.al; and org.al), 7 of them belong to universities and the rest of the state institutions (Parliament-Parliament . al, Presidency -president.al) or private companies (Coca Cola - cocacola.al,AMC - amc.al, Vodafone - vodafone.al, KPMG - kpmg.al). The main domain “AL’ is on server in Italy and appers to be difficult and costly to have this domain. Albanians prefer to choose one of the primary sub-domains. Until July 2002, there are 71 entries in the domain “Com.al”, 21 entries in the domain “Edu.al”, 42 in the domain “Gov.al” 30 in “Org.al” and 2 in “Net.al”. The local NIC- domain is responsible for ERT. Registration is free for educational institutions, for everyone else; the cost is $100 for 2 years. Only organizations legally registered in Albania can get domain names directly in these sub-domains. However, most ISP’s offer secondary registration to their clients. Exist plans for a revision of the domain names registration. Under these plans, since September 2002, the main domain names and other domains should be kept in the country, making it possible their registration in primary level.

So we can find that:

There are a number of obstacles that still must be treated, which are partly cultural and economic problems such as electricity distribution. Also high levels of poverty especially in remote regions of the country poses a challenge to spread the use of information technologies for the researches. Most associated with information technologies for research, a major problem is the lack of data on the spread of information technologies for the research in the country, it is very difficult to understand the use of information technologies for research by different organziations and different projects financed by donors. Another problem associated with this is the difficulty for small and medium enterprises (SMEs) to find relevant information for their businesses. Studies have shown that many such enterprises (SMEs) have to rely on services such as business plans and management base, especially to provide the necessary capital. Furthermore we can talk about a limited technical training and professional sevices and accounting and control weaknesses. Very few companies have websites and understand the importance of information technologies for research. Content providers are focused to use servers abroad, because of frequent power outages, which may discourage business internet use within Albania.

Although public administration uses computers, yet they are still absent and are not yet developed institutional applications which can be the basis for an efficient job in the administration and beyong to achieve e-goverment applications. Eduacation at all levels is regarded as fundamental to society.Rapid developments in this field require necessarily continuous training the auditors in this sector.

Establishing a surveillance system should not be considered as a purpose in itself. It must harmonize best roles among supervisors on one hand and the professional body from the other hand.

To be in accordance with the Eighth Directive, the public oversight authority can


take over coordination of the drafting and / or adoption of professional standards, may have the right to conduct direct investigations of the auditors and audit firms, etc. Public oversight must have ultimate oversight responsibility for issues such as approval and registration of statutory auditors and audit firms, the adoption of standards of professional ethics, internal control and audit quality, discipline systems, investigating and providing security for quality.

All these tasks can not be realized without the role of professional body, which in addition to duties, which is the ultimate responsibility of the supervisory authority will need to correct by itself issues such as entry into the profession, continuing training, implementation of professional standarts, control quality etc.

This can be achieved only in the process of testing the knowledge is fair, transparent and unaffected. The system of certification should remain a right of public authorities’ present experts, auditors.

4.2 Technology Achievements

There are different ways to express the achievement and the use of technology in a general way. One way is that of the patents number. Patents and license fees are those that approximate level of technological creation. Under the Patent Registration Office, the number of patent data in Albania is 60. According to the Statistical Institute of fees for licenses amount is 0.

This report presents the technological achievement index (IAT - TAI), which aims to capture how a country creates and delivers technology, and create professional human basis, which reflects the opportunity to participate in the technological development of the network era. This is not a measure of how the country leads the global development of technology, but it is focus on how much a country in its entirety takes part in the creation and use of technology. IAT aims to help policy makers determine the strategies and technologies. IAT is a composite index that helps a country to establish themselves in relation to others. The conception of the index reflects two distinct aspects. First, focus on indicators that reflect the political attention to all countries, regardless the level of technological development. Secondly, it aims to be useful for developing countries.

IAT focuses on four dimensions of technological capabilities that are needed to harvest the benefits of the network era. Selected indicators are related to important objectives of technological policies for all countries, regardless of their level of development. These four dimensions are:

■ Creation of technology ■ Diffusion of innovation ■ Spread of old innovations ■ Human professionalism.


Each of the four dimensions has equal weight. Each of the indicators that constitute the dimensions has also the same weight.

Future plans for improving information systems in public administration

There are organizing plans for the improvement of the information technology and communication such as:

To Change / improve hardware systems, associated with the replacement of

respective functional systems.

To expand and require intensification in using the information technologies.

Work towards providing Internet services. ■ Improving methods of data transfer.

However, if they encounter obstacles in this effort, the most important are: a) communication service with low quality in Albania; b) the security issues of electronic data c) lack of maintenance services; d) the high cost of initial investment and periodic operational costs.

Legislation to liberalize the restrictions is seen as a key factor in improving efficiency. Reporting is still in low professional levels. Physical transfer policies with reports Floppy is implemented only recently, while later reports was given to the physical copy.

As a result we can highlight:

Albania has made significant progress during the past three years and many changes were made in public administration. These changes have helped to improve the functions of public entities and the alignment of laws and practices with international standards. Some of these changes can be compared with best practices that currently apply in EU countries (for example the new Law on Budgetary System Management and his references to internal control). Given the rapid economic development of Albania, making changes requires not only institutional reforms but also changes in culture and in how civil servants perform their work. Albania will continue to develop the Public Internal Financial Control in accordance with EU requirements and international standards of financial management and budgetary control and administration. Implementation of all these standards by all public administration in Albania is a prerequisite for recognition and respect of all legal norms and requirements of the EU to candidate countries that are on the path towards integration with the EU. Fulfilling the Plan of Action has a tremendous importance for ensuring powerful systems and appropriate management and control and internal audit function. The Action Plan also sets out areas where further support is required and technical assistance.


5 Conclusions and recommendations1. Albania shows promising developments in the information technology

sector. This is very impressive, when compared with the situation a few years ago, and although Albania is still the European country with the lowest penetration of information technology.

2. A major problem associated with information technology is lack of data on the spread of information technology in the country; it is very difficult to understand the use of information technology by different organizations and different projects financed by donors.

3. Although public administration uses computers, yet they are still absent and are not institutional develop applications which can be the basis for an efficient job in the administration and beyond to achieve e-government applications.

4. To comply with the Eighth Directive, the public oversight authority can take over coordination of the drafting and / or adoption of professional standards, may have the right to conduct direct investigations of the auditors and audit firms, etc.

5. The real mission of a department of internal information technology audit is to assist in the improvement of internal controls in an organization.

6. Auditors are not really independent but must be regarded as objective.

7. The best case and an effective information technology audit group is the control provided on all layers and not only in that application.

In connection with recruitment or training of auditors we recommend:a. Complexity of the Information Technology environmentb. Boundaries and complexity of computer audit tasks to be undertaken;c. Computer education to existing staff;d. Need to provide necessary training during al the time;e. Advising foreign computer experts

6 LiteratureReadiness as a tool for development of information technology. Overview of the

processes presented in electronic readiness. InfoDEV Annual Report.

Electronic source: http://www.infodev.org/library/working.htm.

Albania: Electronic Readiness Assessment, by Robert Horvitz.


<[email protected]>, Global Initiatives of Internet Policy.

Albanian National Report, SEED - Southeast Europe’s Digital Economy, IST / statistical data for purposes of the summary-based OECD, Albania

ESIS, European questionnaire for the Information Society, Commission Evropian.http: / / www.eu-esis.org/“

Albania: Business Guide, Deloitte Touche Tohmatsu International

Strategy for Albania, document of European Bank for Reconstruction and Development, 10 April 2002

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Crisis and liquidity risk management in the banking sector: Albanian case

Brunilda Duraj,* Juliana Imeraj,** Elvana Moci***

*Dr. Lecturer, Economic Faculty, University of Tirana@: [email protected], [email protected]

**PhD Candidate, Credit Bank of Albania@: [email protected]

***PhD Candidate, National Bank of Greec@: [email protected]

AbstractThe financial crisis that began in 2007 has revealed a need for a new supervisory

and regulatory approach aimed at strengthening the system and containing the risk of future financial and economic disruptions. The aim of the paper is to analyze the current liquidity risk management techniques and supervisory approaches, in order to identify how both could be improved in the light of the recent market turmoil caused by the crisis and potential sources of instability directly connected with the “originate-to-distribute” business model.

A part of this paper is the analysis of the Albanian banking sector and the measures that the central bank has taken in order to manage the liquidity risk. When banks are facing troubles, authorities often engage in regulatory interventions and/or provide capital support to rescue the bank and reduce the bank’s risk taking. An unintended effect of such actions may be a reduction in bank liquidity creation, with


possible adverse consequences for the whole economy.

In this perspective, it is also investigated the effort of a regulatory authority to validate the adoption of internal models for liquidity risk management.

Key Words: Liquidity risk management, measures, Albanian Banking System, financial indicators

1 IntroductionLiquidity risk is a very important issue for the financial system. This importance

was demonstrated by the latest developments in the worldwide financial markets where liquidities, their measurement and management determined the survival of the institution itself.

In this framework, the measurement of the liquidity is a very important matter even in the Albanian money market. The calculation of liquidity risk and its funding is on the focus of bankers in Albania. Currently in Albania operate 16 Commercial Banks, two of which are branches of foreign banks. Developments during 2009 presented a challenge in managing the liquidity in the system under strained liquidity situation in the global financial markets. In order to better manage the situation, Bank of Albania requested from banks daily reporting on certain elements associated with their liquidity positions, an mainly their relations with non-resident financial institutions and the daily performance of their deposits.

First, in this article will be discussed the theoretical side on principles of liquidity risk management, the early warning indicators of liquidity risk, some guidelines on risk management and continuing with the situation in Albania for the liquidity risk management, ending the paper with the conclusions.

2 Principles of liquidity risk managementFinancial institution identifies, assesses and manages its liquidity risk based

minimally on the following principles: ■ the principle of relying, as much as possible, on sustainable financing

sources; ■ the principle of minimizing the differences between current and

contractual maturities; ■ the principle of maximizing the diversification of financing sources, by

type, currency instruments, maturity, number of clients and markets; ■ the principle of balanced / controlled expansion of the activities and

maintenance of an adequate amount of liquid assets;

Brunilda Duraj,* Juliana Imeraj,** Elvana Moci*** 181

■ the principle of human resources availability, for an effective liquidity risk management.

In accordance with these principles, the financial institution forecasts and monitors the inflows and outflows of funds for certain periods of time. The forecast takes into consideration all types of inflows and outflows, including off-balance-sheet inflows and outflows.

3 Early warning indicators of liquidity riskFinancial institutions should monitor external and internal factors that serve as

early warning indicators of liquidity risk. These indicators will help the Management or Board of Directors of the financial institution to monitor or analyze additional problems more quickly.

Some of these indicators are the following: ■ negative trends and/or heightened risk associated with a particular

product and/or business line; ■ rapid growth of assets, especially when funded with volatile sources (or

by large creditors / depositors); ■ growing concentration in assets and/or liabilities; ■ significant deterioration in bank’s earnings, asset quality and overall

financial condition; considerable increase/decrease of net positions in selling/purchasing by currencies;

■ a decrease of weighted average maturity of liabilities; ■ repeated breaches of internal or regulatory limits set out for liquidity

indicators; ■ an aggressive increase of loan portfolio or of the number of approved loans; ■ limitations or depletion of credit lines by correspondent banks; ■ increase in the rate of deposits’ withdrawal; ■ increase in the rate of early redemptions of certificates of deposits (CDs);

External Indicators that are published by financial analysts, include: ■ Negative publicity; ■ Downgrade of bank credit rating; ■ Stock price decline; ■ Difficulties accessing longer-term funding or increase of debt cost.

Factors that contribute in the reduction of liquidity risk are: ■ Strong financial condition


The best way to reduce liquidity risk is the institution’s financial position to be strong and reliable to the market and ready to meet massive withdrawals of deposits. Past experiences have shown that if the financial conditions of a financial institution have declined, although having sufficient liquidity, it has been insufficient to meet withdrawals of deposits, loans closures etc.

■ Stable sources of funding

Financial institutions that have access to reliable sources of financing are less likely to be vulnerable to liquidity risk, compared with those Institutions that depend on volatile funding sources. Financial institutions can obtain reliable sources of funds by seeking irrevocable credit lines, which are much more stable than the advised lines, which in case of shortage in the market, are likely to be suspended.

■ Customer service

Financial institutions that depend on short-term depositors should focus on their service in order to retain these customers. If service quality is declining, management maybe faced to the fact that the deposit base is not as solid as they thought, and customers can transfer their funds to another financial institution.

■ Appropriate planning of liquidity (risk management)

Liquidity planning is very important if management has chosen sustainable sources of funding or volatile ones, or if it intends to chose a number of financing sources. Liquidity planning can be accomplished in many ways and there is not a single method that is performed equally by all institutions.

If the financial institution’s financial structure is very flexible and risky then the risk management system must be complex. If the financial institution faces stable and predictable flows of funds then the institution is less exposed and has no need for a complicated mechanism of risk management

■ Balance sheet structure

Liquidity risk can be reduced by keeping liquidity in the asset side of the balance sheet. Management of liquid assets means management / maintenance of Cash, loans and securities, appropriate loan structuring, or sale of loans to increase liquidity. However, management must understand that the sale of assets in times of crisis does not always provide the expected returns.

4 Guidelines for risk managementAn effective risk management should consist of four main processes:

■ Identification of risk; ■ Measurement of risk; ■ Monitoring and reporting;


■ Risk Control.

Senior Management must be able to identify and evaluate a preliminary source of liquidity risk carefully and accurately and within a certain time. To identify potential sources of risks, the management should identify existing risks or the previous ones, or potential risks from new businesses, laws and regulations. Senior Management must constantly monitor the sources of liquidity risk, not only for a single transaction but also for the entire portfolio.

Risk assessment system of a financial institution should cover a variety of liquidity risk sources. To select an appropriate risk measurement system for a financial institution, the executive must understand the nature and structure of financial products and transactions. Financial institutions that rely on large creditors, should have a good system of risk measurement based on which it will perform transactions.

Executive must constantly test whether the risk management process is still the one that has been in the past. For example: They can periodically review the analysis of capital flows, in order to verify whether the reports reflect the real situation in the balance sheet or off balance sheet items. Evaluation of the reporting system should be updated whenever there is a change in products or other changes.

Significant Factors for an effective risk management consist of management information systems, risk limits, internal controls, management reports and contingency plan.

■ Contingency plans

Part of the liquidity management process is the preparation of a contingency plan. Contingency plan is an estimate of cash flows and a plan which provides funds by forecasting the demand for capital and identifies the available sources in the market in different situations such as in times when assets grow faster or deposits may be suddenly withdrawn. An efficient contingency plan should minimally answer these questions:

1. What is the plan of the management if faced with crisis?

2. Which method will use the management to assess fund in emergency situations?

ALCO and / or the heads of departments should review and update the contingency plan at least annually in order to ensure its efficiency.

■ Determining risk limits

Board of Directors of the financial Institution and the managers of other departments should set risk limits based on the nature and the degree of acceptance of a certain level of risk. These limits should be reviewed and changed in accordance to circumstances and strategies of the institutions.

There are two main ways to determine risk limits:

—Dynamic method: determines the maximum level of mismatch of aggregate


cash flows at a certain point in time.

—Static method: sets a minimum level of liquid assets to short term liabilities ratio.

■ Asset Liabilities management policy

A good management policy of Assets and Liabilities requires a good coordination between the relevant departments. This policy should specify the rights, the duties and responsibilities of decision makers regarding liquidity matters.

5 Liquidity risk management in AlbaniaThe withdrawal of deposits during 2008 caused liquidity problems for Banks.

Therefore, to increase liquidity in the market, Bank of Albania in December 2008 decided to allow banks to use up to 40% of required reserve in lek (from 20% limit set at first). Further more, following the latest developments in international (collapses of some well known international banks) and domestic market, Bank of Albania adopted regulation no. 71 dated 14.10.2009 “On the management of liquidity risk”. This regulation altered the definition of liquid assets by making them more conservative and introduced the threshold of 20% for the ratio of liquid assets to current liabilities of up to one year. In December 2010, this ratio was estimated at 30.6%, of which 42.9% is in ALL, 15.6% in EUR and 23.9% in USD. The liquidity situation in foreign currency, particularly in euro needs careful monitoring. Chart 1 shows the quarterly performance of this ratio.

Figure 16.1 — Quarterly Liquidity ratio. Source: Bank of Albania


In November 2011, BOA made some new amendments to this regulation. The main changes consist in imposing liquidity ratios at 20% for lek and foreign currency separately & increasing the minimum of total liquidity ratio from 20% to 25 %. These amendments are made in line with the Basel Committee recommendations in order to bring the Albanian banking regulations closer to EU standards.

Loans / Deposits Ratio

Loan to deposit ratio improved during 2011 especially for Lek, and this was mainly due to increase in LEK lending. However this ratio in FC slightly decreased during 2011 due to the preference of banks to lend in lek rather than in foreign currency.

0

10

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30

40

50

60

70

80

90

100

110

2006 2007 2008 2009 2010 2011

ALL

FC

All currencies

0

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20

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40

50

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2006 2007 2008 2009 2010 2011

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Figure 16.2 — Loans / Deposits ratio, in total and separately in ALL and FC, 2006-2011. Source: Bank of Albania

Chart 2. Borrowing in the interbank market or from the Bank of Albania is another way banks manage their short-term needs for liquidity. This is generally collaterized borrowing, and the type and adequacy of assets that may serve as collateral is another element that calls for monitoring in order to assess banks’ capacity to meet their short-term needs for liquidity. As from January 2010, the Bank of Albania continued to inject liquidity in the interbank market. Once the banking sector’s liquidity improved through the growth of deposits since early year-2009, banks’ bidding for liquidity from the Bank of Albania was lower. Hence, the volume of Bank of Albania’s transactions has been declining. The amount of liquidity injected at end-December 2010 was about All 13.9 billion from All 26.6 billion at end-June 2010. Throughout 2010, banks were allowed to use daily up to 40% of their required reserve in lek (from 20% decided in July 2008). These successive operations of the Bank of Albania have aided the financial system’s liquidity and have smoothed the interbank market situation, thus allowing for stable interest rates in the market.


Figure 16.3 — Volume of liquidity provided by the Bank of Albania in the open market.

The structure of assets and liabilities of banking system during 2007-2010 is as follows:

Table 16.1 — Main items of assets of banking system. Source: Bank of Albania (* in billions of ALL, ** in %).

IndicatorDec. 2007 December 2008 December 2009 December 2010Sum* Share

**Sum* Share

**Change

**Sum* Share

**Change

**Sum* Share

**Change

**1. Treasury and interbank transactions

293.1 39.5 251.4 30.1 -14.2 254.3 28.7 1.2 296.2 29.9 16.5

of wich:transactions wish Central Bank 67.1 9.0 69.2 8.3 3.3 69 708 -0.4 82.2 8.3 19.2

T-bills 127.0 17.1 107.0 12.8 -15.8 106.3 12.0 -0.7 103.0 10.4 -3.1transactions with other banks 83.0 11.2 55.4 6.6 -33.3 58.0 6.5 4.8 91.9 9.3 58.5

2. Operations with customers (gross)

290.6 39.1 394.1 47.2 35.6 446.0 50.3 13.2 486.5 49.1 9.1

3. Security transactions 133.3 18.0 166.7 20.0 25.1 177.7 20.1 6.6 210.7 21.3 18.5

4. Other assets 9.7 1.3 8.4 1.0 -12.6 8.2 0.9 -3.5 9.1 0.9 11.75. Fixed assets 11.1 1.5 15.2 1.8 36.3 14.7 1.7 -3.2 13.8 1.4 -5.8Total assets 742.3 100 834.1 100 12.4 886.3 100 6.3 990.6 100.0 11.8

The main highlights of the banking system assets in 2010 compared to 2009 are as follows:

■ Increase in treasury & interbank transactions by ALL 41.9 billion or 16.5%, mainly due to the substantial increase in transactions with other banks,


credit institutions and other financial institutions by ALL 33.9 billion or 58.5%, and also with the Central Bank by ALL 13.2 billion or 19.2%;

■ Increase in lending by ALL 40.9 billion or 9.1%; ■ Increase in security transactions (other than the Albanian Government

T-bills) by ALL 32.9 billion or 18.5%, mainly due to the increase in investment in fixed income securities by ALL 31.4 billion or 17.9%.

Table 16.2 — Main items of liabilities of banking system. Source: Bank of Albania (* in billions of ALL, ** in %).

IndicatorDec. 2007 December 2008 December 2009 December 2010

Sum* Share**

Sum* Share**

Change**

Sum* Share**

Change**

Sum* Share**

Change**

1. Treasury and intrebank transactions

42.2 5.7 98.8 11.8 134.3 89.9 10.1 -8.9 61.2 6.2 -31.9

2. Operations with customers (gross)

621.8 83.8 633.

8 76 1.9 683.8 77.2 7.9 805 81.3 17.7

3. Other liabilities 7.7 1 9.48 1.1 22.7 5.7 0.6 -40.3 7.5 0.8 32.9

4. Permanent resources 62.2 8.4 80.4 9.6 29.3 96 10.8 19.5 104.

8 10.6 9.1

Total liabilities 742.3 100 834.

1 100 12.4 886.3 100 6.3 990.

6 100 11.8

The main highlights of the banking system assets in 2010 compared to 2009 are as follows:

■ Decrease in treasury and interbank transactions by ALL 28.7 billion or 31.9%, mainly due to the decline in “T-bills and other eligible bills” by ALL 19.2 billion or 59.6%, and the decline in loans received by ALL 15.4 billion or 33.6%, while banks and financial institutions’ deposits increased by ALL 6.9 billion or 106.1%;

■ Operations with customers increased by ALL 121.2 billion or 17.7%, where the major contribution is provided by the increase in operations with the private sector by ALL 118.1 billion or 17.4%;

■ Increase in permanent resources by ALL 8.8 billion or 9.1%.

Liquid Assets

In 2010, liquid assets grew ALL 20.9 billion (or 8.8%) to ALL 257 billion compared to ALL 245 billion at end-2009. In terms of their composition, securities have the major share, meeting the liquidity regulation criteria by about 66.5%. Current accounts and bank deposits with remaining maturity of up to seven days account for 20.5%.


Figure 16.4 — Monthly liquid assets and liquidity.

Figure 16.5 — Liquid Assets by currency.

Concerning the composition by currency, assets in the Albanian Lek have the largest share, accounting for 71% of total liquid assets, followed by EUR-denominated assets, 20.8%, and USD-denominated assets, 5.8%. This composition seems to have changed compared to the previous year, with ALL assets reducing their share in favour of EUR assets.

The gap between assets and liabilities of up to 1- and 3-month remaining maturity remains negative. At end-2010, however, it seemed to narrow compared to 2009. Gap to total assets ratio for short-term periods, albeit volatile throughout 2010, improved in December 2010 compared to end-2009.


Figure 16.6 — The structure of assets and liabilities by maturities.

6 Conclusions ■ As a consequence of the recent international crisis, it became necessary

to review the theories in the management of liquidity risk. ■ The confidence crisis that enveloped financial markets during 2008,

caused a significant lack of liquidity in financial markets, dried up sources of funding for banks and had a tremendous impact on banks that relied on money market funds (wholesale).Increased perception of risk between the parties forced financial institutions to become more cautious. They began to collect and preserve liquidity, seriously damaging the functioning of the interbank market and causing the increase of interest rates for interbank lending. Many of the financial institutions faced difficulties in settling their short-term obligations. Central banks in most developed countries, adopted several programs to ease the situation. They consisted of injecting liquidity into the market by using repurchase agreements with longer term, expanding the types and maturity of securities serving as collateral, making use of some special programs for certain types of financing of debt securities.

■ Liquidity is important for all banks to cover for expected and unexpected fluctuations in balance sheet and provide funds for growth. Its cost is a function of market conditions and the degree of risk, as well as the interest rate and credit risk, reflected in balance sheet of the bank.

■ The main objective of liquidity risk assessment is to verify whether the management of financial institution has applied a control system which can identify, measure, monitor and manage liquidity. Liquidity Risk


assessment can be made in accordance with standards set by the Basel Committee on banking supervision.

■ Identification of risk and further more its monitoring are two important steps. On the other hand, the control system of liquidity risk management must be efficient and accurately reflect the actual situation of the institution.

■ Psychological factor is very important to be taken into consideration, as a result of the sensitivity of the public, informed or not, towards financial developments in the country.

■ The crisis has given many precious lessons to countries worldwide, starting mainly with changing and adapting the regulatory base to the new environment created in the market.

7 ReferencesBank of Albania, Financial Stability Report, QII 2010.

— Supervision Annual Report, 2010.

—, Statistical Report, December 2011.

Bank of England (2008), Handbook No. 27 Liquidity forecasting.

Basel Committee on Banking Supervision (2000), Sound Practices for Managing Liquidity in Banking Organizations.

— (2008), Liquidity Risk: Management and Supervisory Challenges.

— (2008), Principles for Sound Liquidity Risk Management and Supervision.

— (2009), Principles for sound stress testing practices and supervision.

Bangia A., Diebold F., Schuermann T., D. Stroughair J., “Modeling liquidity risk, with implications for traditional market risk measurement and management”.

Duraj B., Imeraj J., (2012) “Reaction of Albanian Banking System: protection against risk or increase of its effects?”

European Central Bank (2004), Liquidity, information, and the overnight rate.

RISK

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Impact of economic crisis in health care system in Albania

Enkelejda Avdi

MPA, Department of Management, Faculty of Economy, University of Tirana@: [email protected]

AbstractThis paper aims to explore the current and potential impact of the economic crisis

on health sector financing, programming and outcomes in Albania. Government and Health Insurance Institute (HII) face the double challenge of limited financial resources and increasing demand for health care services. The Primary health care reform started in 2007, designed to spend more resources at an early stage on prevention and primary health care, in ways that maximize health outcomes. Reforms in health care system and cost control mechanisms are being implemented, with the aim of making primary health care delivery more efficient, sometimes in response to pressure exerted by patients. It will also take a closer look at how health services are organized, to ensure that the necessary treatment is offered at the right level and that there is good coordination between primary, secondary and tertiary care. I’m referring in primary and secondary data from OECD, World Bank, HII, INSTAT, reports and papers related this field. Albania faced with lower expenditures than needed in health, informal payments and increases in the price of health services and pharmaceuticals. The pharmaceutical market is affected because the financial crisis is exerting upward pressure on drug prices. It is important the right balance between public expenditure,


social spending and private financing. Need to use the opportunity of crisis to ensure universal access to health services, ensuring social safety nets for the most vulnerable social groups, understanding of the strengths and weaknesses of health system management as a way to ensure a positive contribution from health systems in times of crisis and beyond.

Key words: Crisis, Healthcare Scheme, HII, Health Expenditures, Health care services.

1 IntroductionThe global economic crisis has had a significant negative impact on public health

and health care systems worldwide. The impact has been particularly sensitive to the health of the population groups with low incomes, and for women and children. Increased unemployment and poverty during the crisis as well as payments for health care services that people often do not require periodic medical care. It is important to face the impact of the crisis in the health care system is that the government could keep to the same level for the health budget and see the crisis as an opportunity to take strong decisions on reforms that should be performed, giving long-term contributions to the management of the health care system analyze relationship between economy and health care policy, giving priority to investment in human capital and improve their productivity and best use. Both sectors private and public health care should understand the importance they have investments in health care, especially in human capital spending and continuing education of primary care and research are very important to the welfare and sustainability of health care and economy for present and future generations. Time of economic crisis is a time to modify health care systems, thus abandoned what was excessive and unnecessary and at the same time be supported resources for health care. Attention must be given to providing appropriate services to patients’ basic needs. Decisions must be taken by channeling new resources towards prevention, promotion and primary health care. The economic crisis is the time for taking responsibility, together with public and private sector which have a particularly important role in determining the health issues in public and political agenda. Health budgets should be protected and used rationally. It is necessary to establish a high priority on health care and health care spending during the economic downturn.

The direct impact of the global financial crisis on low-income countries will be stronger for countries with a higher degree of financial integration. For most, this channel has played a limited role so far, though strains are starting to appear. But, the slowdown in global growth will reduce trade, remittances, foreign direct investment and possibly, aid, and these factors will have a major impact on LICs, including second-round effects on the financial sector1.

1 The implications of the global financial crisis for low income countries. March (2009). IMF. FMN.

Enkelejda Avdi 193

The countries of South Eastern Europe have been affected in quite variable ways by the economic crisis. Some countries such as Bulgaria, Croatia, and Romania have been hit hard, while others such as Albania, Kosovo and Macedonia appear to have got off more lightly, so far2. In times of crisis, health outcomes and the risk of health-related financial hardship may be affected by changes in the resources available for health systems (financial and human resources, drugs and medical devices, running costs and infrastructure), by changes in living conditions, lifestyles and consumer behavior, and by changes in social norms and values. Ideally the health system can and should do three things: protect those most in need, concentrate on areas in which it is effective and adds value and behave as an intelligent economic actor in terms of investment, expenditure and employment3. Private expenditure on health almost always falls as disposable household incomes fall. Government expenditure on health often but not always falls, partly because government revenues fall or the health budget is disproportionally cut. Some governments, however, have in the past increased health and social sector spending during a recession4.

Initially, some countries had planned to expand their 2009 budgets. Increases had been announced in Armenia (about 20%), Albania (about 4.7%), Georgia (about 21%) and the Republic of Moldova (30%), as well as in the Former Yugoslav Republic of Macedonia, Kyrgyzstan and Turkey. However, most budgets were drawn up on the basis of previous revenue and spending projections, and these have since changed dramatically. It is uncertain whether these increases can be sustained. Some of these countries may have to deal with a situation where they obtain only 50% of the revenues that they had expected when developing their draft budgets.

2 The challenges of albanian health system in the current financial and economic crisis

The effects of the global economic crisis have been transmitted to the Albanian economy. The impact on the Albanian economy is yet to be determined and it expected that the full extent of the crisis will not be felt until a later moment due to the lack of full integration in the global markets5. The Albanian economy seems to have escaped relatively unscathed even in 2009, when the impact of the global crisis was felt in many developing countries. Figures from the EBRD show that in 2009

2 Will Bartlett and Vassilis Monastiriotis Economic Crisis: a New Dawn or back to Business as Usual? LSEE – Research on South Eastern Europe European Institute, LSE (November 2010)

3 Regional Committee for Europe Fifty-ninth session Copenhagen, 14–17 September 2009 Observed and potential impact on health and health systems.

4 Evans D (2009). The impact of the economic and financial crisis on global health (Presentation at the high-level consultation on the financial and economic crisis and global health, Geneva, 19 January 2009).

5 SOCIAL DIMENSIONS OF THE GLOBAL CRISIS IN ALBANIA THE FASON INDUSTRY AS A CASE STUDY (June 2010).


the average growth rate of the South Eastern European countries was -6.2%; whilst Albania registered a positive growth rate of 3%6. This led the IMF to conclude that “in the face of strong headwinds, the Albanian economy has weathered the global crisis fairly well so far” where “sound economic policies and Albania’s still limited integration into global markets have helped to mitigate the negative impacts of the global financial crisis”7.

Bank of Albania figures indicate that private consumption appears to have decreased in 2009 due to the increase in unemployment, the reduction of remittances, credit for consumption, and increased insecurity during 20098. The effects of the crisis were magnified for countries with a heavy dependence on remittances and migration.

The share of health expenditure that is accounted for by private out-of-pocket expenses generally falls as per capita income increases. For the transition economies this private share is relatively high and this not only harms the poor more but also increases their health vulnerability during economic recessions9.

Despite a positive growth rate, the Albanian economy remains one of the poorest in Europe, and any slowdown of the economy is likely to affect population groups and different sectors of the economy disproportionally10. The Government of Albania faces the double challenge of limited financial resources and increasing demand for health care services, owing to aging populations and changes in the burden of disease. Albania is currently having a reform of its health system, designed to spend more resources at an early stage on prevention and primary health care, in ways that maximize health outcomes. It will also take a closer look at how health services are organized, to ensure that the necessary treatment is offered at the right level and that there is good coordination between primary, secondary and tertiary care. The crisis does not pose a major threat to public health itself, although it is indeed having health effects; on the other hand, it is a danger to the financing of health systems, so Albania will have to adjust public spending and control long-term expenditure. Reactive strategies, such as cutting salaries, adjusting pharmaceutical pricing and adopting measures to protect the poor, seem to be more economically effective than proactive ones, which tend to improve the quality of health care rather than reduce expenditures.

Good health is perhaps the most important precondition for well-being and productive societies, so continued and sustainable investments in health are crucially important. Efforts will be made to combat budget cuts in health, education and social protection, to continue to allocate sufficient resources to the health sector, and to

6 EBRD 2009 Transition Report.7 IMF Preliminary Report 2010.8 Bank of Albania, 2010, Report on the Second Half of 2009 Monetary Policy Department.9 Robert C. Shelburne and Claudia Trentini UNECE DISCUSSION PAPER SERIES, No.

2009.2 November 2009 Public Health in Europe: The 2007-2009 Financial Crisis and UNECE Activities.

10 Bank of Albania, Financial Stability Report, 2009, IMF Preliminary Report, February 2010.

Enkelejda Avdi 195

spend health budgets more wisely. The situation of the Albanian health care system in relation to the global economic crisis, identify the health problems caused by this impact. On a personal level, the crisis will impact many of the social determinants of health, such as income, employment, education, nutrition, corporate practices and taxation. GDP growth projections are being revised downwards, economic activity is declining and unemployment is increasing. This is leading to decreased contributions to social health insurance and reduced budgets for health care institutions. In Albania public expenditures for health get only 2.7% of GDP.

Figure 17.1 — Budget of Health Ministry for health care (as % of GDP). Sourse: MOH, MPB -Programi Buxhetor Afatmesem 2012-2014 - Ministry of Finance.

The health system response is based on a number of principles: to maintain solidarity, with fair and equitable redistribution of the financial burden for health, to protect the most vulnerable population groups, to increase efficiencies, building on the achievements already made through health system reform and to protect and continue investments in health. Government spending on the health system is correspondingly less.

Figure 17.2 — Trend of health insurance expenditures from 2007 – 2014. Sourse: MOH, MPB -Programi Buxhetor Afatmesem 2012-2014.


2.1 Health insurance scheme in Albania

Health services in Albania are provided by a mix of public and private health service providers. Hospital service is provided by MOH and other public institutions. HCS is provided through a network of general practitioners and a private network which is rapidly developing in this sector. Pharmacies, dentists and other supportive health services are completely offered by private entities. Ministry of Health remains the main stakeholder in devising policies and the health system regulator. Local authority also plays a role regarding the allocation of public resources for the health sector at regional level.

There is a compulsory health insurance scheme in Albania. Participation in the scheme is based in the payment of contributions by: a) economically active persons - employees, employers, self-employed, unpaid family employees, persons who receive revenues from their property on regular basis. b) state - which pays for economically non-active persons, children, students, pensioners, unemployed, mothers on maternity leave, disabled people, persons living on assistance and economic aid, c) Voluntary insurance. Contribution rate is 3.4% for the employed (is divided between the employer and the employee), 3 up to 7% of a minimal wage for the self-employed according to village, city etc. The state makes a fixed payment for the non-active population based on the consumption per capita of the healthcare during the successive year. The contributions are collected by the Tax Office.

The Health Insurance Institute (HII) administers the health scheme and manages a total budget of approximately 200 million Euros. Parliament by its law for special funds where the budget of HII is part is totally balanced for both revenues and expenditures. This budget takes 2.1% of GDP in Albania. High value investments related to the purchase of screening equipment, reconstruction or construction of new buildings are part of the budget of the Ministry of Health. Public health care provider has the right to use the secondary revenues that are realized during their activity, in determined rates for salaries and rewards, goods services and other investments of small value.

Health services covered by health insurance scheme are; health services of the primary health care, hospital health care services (PHC) and pharmaceuticals reimbursement. HII purchased health services from primary health care since 2007. This service is organized in health centers which operate in all local government units (416 health centers). PHC is financed on the basis of the service package and primary health care financing formula is: 80% of the budget is calculated on the basis of the history of expenses; 10% of the budget is financed on the basis of the number of daily visits to the Center (the Administration Council of HII has approved daily rates that a GP must achieve, actually a GP has 12 visits per day); 10% of the budget is financed on the basis of the realization of some quality indicators (defined by decision of the Council of Ministers). Health insurances cover pharmaceuticals of the reimbursable drugs list, the current list contains 420 pharmaceuticals and 1066 of their alternatives. Characteristics of the reimbursable drugs list are; pharmaceuticals

Enkelejda Avdi 197

ATC classification, prescription of generic drugs, reimbursement of the cheapest alternative, reimbursements of pharmacies.

The situation that is aggravated by the economic crisis and the accompanying adverse trends in currency rates, which make pharmaceuticals more expensive and difficult to access. Rates of unemployment and non-standard employment are already increasing and are likely to rise further as a result of the economic crisis. At country level, Albanian health system is facing major challenges in paying for imported pharmaceuticals and equipment, so the crisis may give impetus to the development of national industries in these sectors and the increased use of generic drugs. Regardless of whether operating budgets or tendering procedures are administered in a centralized or decentralized manner, management training may need to be stepped up and stricter control exercised over budgetary expenditure, capital investments and the operation of health insurance funds. Every effort should be made to increase the cost–effectiveness and productivity of the health system. The effectiveness of health sector spending can be improved through the use of evidence-based guidelines, appropriate skill mixes and generic substitution of pharmaceuticals. Referring to the last 5 years, the reimbursement of drugs’ expenditures from health insurance scheme, is increased, but the variety of drugs’ expenditures for the last 2 years 2010/2011 is decreased.

25%

20.6%

2008/2007 2009/2008 2010/2009 2011/2010

15.6%

21.4%

21.4%20%

15%

10%

5%

0%

Variety of drugs’ expenditures reinbursable in percentage, 2007-2011

Figure 17.3 — The comparison of drugs’ expenditures from health insurance scheme, for 5 recently years. Source: HII, my calculations.

The trend over the past 3 years has been one of a growing share of public expenditures going to hospital care and prescription drugs, at the direct expenditures of primary care or first level intervention. The decreasing emphasis put on financing of primary care is of concern in an environment in which the population has lost trust in primary care owing to quality concerns and the frequent absence of essential supplies at primary care facilities. Of particular concern is the fact that the budget execution ratio for non-wage recurrent costs at the primary care level has consistently been below that of hospital care.


This has resulted in many primary care facilities lacking even the most essential supplies to effectively provide appropriate care, particularly in rural areas. This has contributed to a situation in which much of the population, particularly in rural areas, circumvents primary care facilities in search of better care at higher end facilities.

3 Some problems of the health insurance schemeCurrent situation of health services offered by the health scheme, despite efforts

made in the last two years, there is at appropriate levels to answer a growing population needs and to deliver quality services. These reflected the shortcomings which relate mainly: the methods of financing providers, the level of management autonomy and hospital providers, the lack of incentive methods for managers and for their staff in order to improve access and quality, with the degree of organization, distribution and operation of the service, human resources available for providing services, as the level and use of medical technology.

Albania spends a below average share of GDP and of total public expenditures on healthcare. As a result, out of pocket spending is high and this has serious equity, poverty and health sector stewardship implications11.

The private sector contributes already 60% of the total GDP but only 27% of the health insurance funds. Only 18% of the Albanian employees work in state companies. Only 40% of Albanians report of having health insurance enrolment. Over 93% of people seeking health care pay for something, most of it as informal payment. Albania allocates about half of all public sectors spending on health to hospital care (compared to an OECD average of 38%). The health expenditures have a strong impact on poverty, with the poverty incidence increasing from 25% to 34% if out-of-pocket health expenditure is subtracted from household income. Out of pocket health care expenditures are wide spread phenomena as well as in the Central and Eastern European countries and Former Soviet Union countries after the fall of the communism (Ensor 2004; Falkingham, 2004; Lewis 2000; Delcheva et al 1997; Vian/Burak 2006; Liaropoulos et al. 2008; Gaal/McKee 2005). As result of: the scarcities of the financial sources allocated to heath care, the lack of efficient policies for both health care financing and for human sources management, as well as high informality present in all sectors of economy.

Financing responsibilities have changed often. The main source of public sector funding is the state budget, but has limits on the amount that governments can spend on health imply the need for explicit or implicit rationing that, in turn, means trades off between the attainment of the health financing policy objectives and the need for fiscal balance.

Hospital expenditures dominate public sector spending on health. Albania

11 European Commission Directorate-General for Employment, Social Affairs and Equal Opportunities Manuscript completed in September 2008

Enkelejda Avdi 199

allocates a higher share of total public sector spending to hospital care than do OECD or EU-8 countries. Hospital expenditures account for about half of all public sectors spending on healthcare in Albania.

The budget mainly is planned based on the historical trends. In the framework of reforming the sector of health, the decentralization is important within the sector, as well as for sharing responsibilities, competences and functions with the organs of the local power. The actual experience is not very positive.

Health contributions would be collected by Social Insurance Institute but the later refused to collect health insurance separately from social insurance contributions. As a result, since social insurance rates are much higher than those for health insurance many people who can’t afford to pay social insurance are denied the chance of paying health insurance in case they wished to. The money generated by contributions cover about 50% of health scheme expenditures and the difference is covered by state budget. It is the low affiliation of the population to health contributions and to the fact that the health contribution rates are low compared to expenditures. The later objective is not at all easy to be achieved since it requires increases of contribution rates that are politically difficult to impose. At the health sector there is still centralization of tasks and budgetary competences from the MOH and central institutions, which has badly influenced in the composition and administration of the public funds. It is worthy to underline that after 2006 the local government units do not have any role and responsibility in the health sector and as a consequence do not play a specific role in the composition and implementation of the budget in this sector. The differences between the contributors and beneficiaries have caused premises for a considerable fiscal evasion, which influence in the raise of contributes from the general taxation. This should be considered the reason for stimulating in an indirect way the bribes and other corruptive elements in this sector. There is a lack of responsibility from the institutions which draft the budget and accomplish budgetary policies and the lack of political consensus and continuous electoral.

4 Reforms in health care system and necessaty of changes

In recent years the Albanian health system is faced with new developments in all types of services offered to the population. Institutions, the policy-decision making, or government agencies, law enforcement based on the necessity of reforming the financing of all our healthcare system, have taken concrete steps in order to improve the mode of delivery of services, improving access the population in their benefit, as well as quality of these services offerings. Funding of services to secondary and tertiary level of health insurance is an important step in the deepening of financial reforms in health care. In Albania as in many other countries, reform of health services is more sensitive to the fact that this service continues to be the most important element


of health care delivery, providing basic services as well as those specialized for the population.

The challenges for the PHC reform are; improvement of the financing system, focusing on increasing the performance and quality of the services (changing the financing report); concluding the electronic registration of the population and the improvement of the payment system per capita; improvement of the quality and performance standards; perfecting the supervising system regarding the financial management, human resources and performance; supporting the process of drafting the clinical practice guidance and give support in the training programs of the Continual Medical Education; the functioning of a unique informative system; cooperating with the Ministry of Health for the fulfillment of the Standards in the primary health services.

Have been observed some problems in hospital sector; there are absences of the Specialist Doctors and this is more visible in the hospitals of the municipal level; lack of provision of the defined services in the services packages; not good indicators of the medical performance; the medical equipments in some hospitals are not of the appropriate standards; inadequacy according to the type of service that should be provided; inappropriate level of qualification regarding the hospital management and the frequent changing of the leading staff and not appropriate informative system regarding the data.

In this situation there are three options for the changes; the first option is maintaining of the status quo (39 hospitals with, 39 contracts with HII. This requires: fulfillment of the standards in 39 hospitals, fulfillment with human resources (especially Specialist Doctors) equipments, devices, etc, larger investments in the infrastructure). This option brings maximal possible access, but has unaffordable financial costs, impossibility for real resources and mainly with specialists, can’t respond to the level of the country development.

The second option is district level (11 District hospitals that have to provide 19 obligatory services; I Level: 5 municipality hospitals with a level of services between the district hospitals and the municipality existing ones; II Level: 11 municipality hospitals. There is possibility to fully provide eight basic services; III Level 8 municipality hospitals are going to be transformed into centers which will provide these services: Emergency 24 hours, micro-surgery, radiology, lab clinical/biochemical). This option has got two main advantages; a better access compared to the existing one in the 5 mentioned municipalities and services’ standardization. But maybe can bring an absence of the flexibility in the provision of the specialized services; contracting in three levels and inappropriate management and social costs.

The third option is regionalism of the services. Advantages: contacting only with 11 District Hospitals, providing 19 (+1) basic services in the district hospitals by outlining the service out-patient as a separated and measurable service, the efficiency and flexibility in the usage of the human resources, financial and technological, etc, this enables the providing of the basic services, absent in 16 municipality Hospitals,

Enkelejda Avdi 201

enables the contracting of the SD with more attractive payments, improvement of the access and increase the quality of the services and standardization of the services and provision of the services according to the needs of the community and make people trust in the hospital services. Disadvantages: absence of managers of this reconfiguration and not appropriate infrastructure regarding the human resources.

Current methods of payment that is based on historic budget associated with lack of autonomy and the hospital management level is not good stimulation is limiting factor for providers to improve service quality and consequently promotes efficient service delivery and cost effectiveness. This kind of approach at the same time does not increase the reliability of patient population and to our health system and also does not favor a fair distribution of financial resources based on performance, in hospital or at the population level in which they serve.

The monitoring of contracts with hospitals, we note that a number of other indicators of activities such as utilization of hospital beds or non-provision of services for which hospitals are funded at a lower level. Thus, this method of financing does not stimulate hospitals to be interested in providing efficient and productive. Do must change the method of payment to hospitals by lifting up the historical budgeting, in the DRG method in many cases combined with a global budget.

5 ConclusionsThe health insurance scheme is currently undergoing a series of challenging

adaptations and reforms in order to improve its performance. One of the priority challenges is to increase population coverage and to extend social health protection to the currently unprotected population share. Impact of global economic crisis in health care system.

The global economic crisis reduced the possibility and willingness for government support of the health care system and decline of contributions as result of rising unemployment and economic output. There is a need for complex measures. Crisis is a serious threat to health care system and we should take all possible measures to diminish the impact of negative consequences. Complex situation needs complex solutions. The structural reforms and cost control measures are being implemented, with the aim of making primary health care delivery more efficient, sometimes in response to pressure exerted by patients. The crisis may also be used as an opportunity to take unpopular steps, such as rationalizing and downsizing the hospital sector.

In terms of allocation of an insufficient budget for health, we need bold steps towards the deepening of financial reform, mainly in hospital sector. There are three scenarios for further reform of hospital services in Albania, selection and implementation of which depends primarily the common will of our political decision makers. Because health is an area with a high sensitivity for the population and implement deep reforms in this direction would have high costs, primarily the social,


so any decision to be undertaken, must be made on basis of genuine and professional studies, and based on the experience of other countries, which have health insurance model, with close to ours.

6 ReferencesBank of Albania, (2009) Financial Stability Report 2009, Tirana (10).

— (2010) Report on the Second Half of 2009 Monetary Policy Department (8).

Bartlett W. and Monastiriotis V. (November 2010) Economic Crisis: a New Dawn or back to Business as Usual? LSEE – Research on South Eastern Europe European Institute, LSE (2).

EBRD (2009) Transition Report 2009. London, European Bank for Reconstruction and Development. (6).

European Commission Directorate (2008) - General for Employment, Social Affairs and Equal Opportunities Manuscript completed. (12).

Evans D (2009). The impact of the economic and financial crisis on global health (Presentation at the high-level consultation on the financial and economic crisis and global health, Geneva, 19 January 2009). (4)

IMF, FMN (2009). The implications of the global financial crisis for low income countries. (1)

IMF (2010) Albania: Preliminary Report 2010. Washington, DC. (7) (10)

MOH, Ministry of Finance (2010), MPB – Programi Buxhetor Afatmesem 2012-2014. (11)

Regional Committee for Europe (2009) Observed and potential impact on health and health systems. Fifty-ninth session Copenhagen, 14–17 September 2009 (3)

Robert C. Shelburne and Claudia Trentini (2009) Public Health in Europe: The 2007-2009 Financial Crisis and UNECE Activities UNECE DISCUSSION PAPER SERIES, No. 2009.2 (9)

Social dimensions of the global crisis in Albania the fason industry as a case study (June 2010). (5)

HII data, www.isksh.com.al

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Risk management in the telecommunication industry. Case study

AMC

Glediana Foto,* Elfrida Manoku,** Valentina Sinaj***

*PhD student, Lecturer at Faculty of Economy; Tirana University Mob: 0692950688, @: [email protected]

**PhD student, Lecturer at Faculty of Economy, “Sevasti & Parashqevi Qiriazi” UniversityMob: 0672050877, @: [email protected]

***Dr., Lecturer at Faculty of Economy; Tirana University@: [email protected]

AbstractFollowing the events that shocked the global financial system during 2008, all

organizations are increasingly paying more attention to risk and risk management. It is understandable that the risk management brings benefits for companies. By undertaking a proactive model for risk management, organizations are able to make improvements in three important areas: operations, processes and strategies.

The aim of this paper is to examine and evaluate the advantages and disadvantages of financial risk management in the telecommunication industry. Moreover, we will make an assessment of financial risk management practices for this industry through a case study conducted at AMC Company. Through this paper we aim at satisfying


several objectives: to define variables that significantly affect the financial management in the telecommunication industry; to asses if the proper management of financial risk in the telecommunication industry significantly affects its progress; and to present what is the current status of the overall financial performance of telecommunication industry in Albania and if there is a significant connection between risk management and progress of organizations in the telecommunication industry.

In this study, the focus will be on the risks in the telecommunication business and financial and non-financial indicators of performance measurement. Descriptive research methods are used, in order to describe, explain and investigate the relationship between different variables dealing with risk management in the telecommunication business. Through this method we will also suggest unanticipated hypotheses. The purpose of using this method is the description of the nature of the current situation at the time the study is conducted to explore the causes and certain phenomena

In order to conclude with accurate results and to ensure reliable recommendations we used trusted data from the financial reports of the two largest telecommunication companies in our market, AMC and Vodafone, and data extracted by the Regulatory Authority (TRE) and previous studies over the same subject in the telecommunication industry.

Key words: risk, risk management, telecommunication industry, financial risk

1 IntroductionThrough this study we seek to examine and weigh the advantages and

disadvantages of financial risk management in the telecommunications industry. Moreover, an assessment of financial risk management practices for the industry will be considered. The study includes reliable data and statistical research. However, undertaking risk calculation, risk management and risk assessment, it can never be complete, since there are always unintended and unpredicted aspects of environment. Business organizations are hiring business managers who can deal with risk and predict the future losses in economy, in order to ensure proper risk management. Although the literature indicates that implementation of this function provides numerous advantages, many authors point out his weaknesses.

Mainly, the purpose of this paper is to study the financial strategies of the telecommunication industry in relation to financial risk. This study attempts to answer such questions as:

What are the variables that significantly affect the financial management in the telecommunications industry? Can proper management of financial risk in the telecommunications industry significantly affect their progress? What is the current status of the overall financial performance of the telecommunication industry in Albania? Is there a significant relation between risk management and progress of organizations in the telecommunication industry?

Glediana Foto,* Elfrida Manoku,** Valentina Sinaj*** 205

2 Literature ReviewFollowing the events in the global financial system during 2008, all organizations

are increasingly paying more attention to risk and its management. It is understandable that risk management brings benefits to companies. By taking a proactive model for risk management, organizations will be able to achieve improvements in three areas: Operations will become more efficient because the events that bring obstacles to business development will be identified in advance and timely actions taken to reduce these event will reduce the damage caused by them in company operations; Processes will be more effective, because the selection of processes and risks associated with options presented is considered. Also, changes in processes through specific projects will be more effective and safer; The strategy will be more efficient in that the risks associated with different strategic decisions will not be acceptable for organizations and organizations do not want to be found in positions where unexpected events lead to financial loss, interruption of normal operations, delay in projects completion and loss of market share. Stakeholders expect that organizations have complete knowledge of the risks that may cause interruption of operations, not completion of projects on time and failure of various strategies.

Various organizations, should take into account the business performance management, as part of performance management business. Business performance management (BPM) is a set of processes that help organizations optimize business performance. According to many financial analysts, the BPM is seen as a new mode of business intelligence as it is focused on business processes such as planning and forecasting. It helps businesses to find an efficient use of business units, financial, human, and material resources. Furthermore, BPM involves consolidation of data from various sources, research and data analysis, and placing the results into practice.

BPM develops business processes by creating better feedback. Continuous and real-time reviews are helping organizations to identify and eliminate problems before they become large. BPM predictive skills assist the organization to take action to repair the problems and give them time to achieve desired earnings projections. Forecasting is characterized by a high degree of expectation which scenarios should answer “what if?”. BPM is useful in risk analysis and forecasting of revenues as a result of mergers or acquisitions of various companies and reveals a plan to pass potential problems. In measuring the performance there are some issues involved. In this study, the focus will be on the risks in the business of telecommunications, and financial and non-financial indicators of performance measurement.

3 Methodology of the studyFor this study we used descriptive research method, in order to describe,

explain and investigate the relationship between different variables dealing with risk


management in the telecommunication business. By this method, it is possible to conduct a study that is free and quick. It also may suggest the contingency hypothesis. Descriptive research provides observations in the study. The purpose of using this method is the description of the nature of the current situation at the time the study is conducted exploring the causes and certain phenomena. In order to conclude with accurate results and to ensure reliable recommendations we used trusted data from the financial reports of the two largest telecommunication companies in our market, AMC and Vodafone, and data extracted by the Regulatory Authority (TRE) and previous studies over the same subject in the telecommunication industry. On the other hand, secondary research data are taken from previous studies and information in the telecommunications industry over the same subject, from articles published about the telecommunications industry information, business strategies, newsletters, audit from financial risk companies, books and studies on strategic management.

While there are several methods for measuring performance, different companies are in doubt which one is most effective method to use. Taking into consideration the financial and non financial models there are two very different systems: the implementation of a mechanism for measuring performance and evaluating existing organization which may bring major changes and adjustments. Moreover, some aspects of traditional systems have deficiencies in non-financial systems and vice versa. Consequently, application of a single system will not result in maximizing the advantages of both systems. Thus, to achieve the analysis that we want, this study will use financial ratios based on information collected by the telecommunications industry in two different companies (AMC, Vodafone). Currently, individual financial details of these telecommunications companies are very discreet, so details of general information on these companies will be used.

Limitations of the study

This study has several limitations that may affect the validity and reliability of results. First, risk management is a relatively new phenomenon in the telecommunications industry in Albania. This is because the industry is relatively new and our country comes from a past with state-controlled economy and management strategies of new businesses in Albania are subject to continuous improvement. Also, implementation of business plans and improving risk management by the Albanian telecommunications companies is due to increased competition, substitute products and customer satisfaction.

Reliability and validity as well as the integrity of data collected, was influenced by the fact that there is little financial information available to the public by companies in the Albanian market, and also information security policies by telecommunications companies, are very strong for reasons of competition that exists in this sector.


4 Risks and uncertainties for mobile companies in the Albanian market

a. Credit risk

Credit risk is the risk of financial loss to the company by outside parties, when they do not meet contractual obligations. The maximum exposure to credit risk at the reporting date is the carrying amount of assets. Proceeds from sales could potentially affect the company’s liquidity. However, due to the large number of customers and their diversification, there is a concentration of credit risk with respect to such income. Concentration of risk that exists for consumers considered “VIP”, due to the relatively small number and high level of transactions they have with the company. For this category, AMC has estimated the risk by following established policies and procedures and has taken the necessary precautions against possible damages.

The company has established specific credit policy under which analyzes the usefulness of credit customers and has an effective management of the attraction of money in case of payment delays and doubts. In monitoring credit, consumers are grouped according to their own credit risk, age profile, and the existence of previous financial difficulties. Customers, who are characterized as suspected, are evaluated in each report; the estimated loss they may cause to the company and limit allowed damage that can be tolerated is defined.

Having considered the money that appears in front of a low level of risk in credit risk, the company has adopted a “policy of deposits” where funds are deposited only with banks. To avoid concentration of risk, the company does not deposit more than 30% of the fund that owns to a only single bank. Financial instruments classified as “available for sale” include listed shares, financial instruments held to maturity, including government securities and treasury bills. Categories of financial assets are not considered to pose a significant credit risk for the company. Loans include loans to employees, which are collected through payroll or related to pension funds. These risks are not likely to pose a significant credit risk for the company.

b. Liquidity risk

Liquidity risk is the risk that the company is not able to meet its financial obligations. Liquidity risk is kept at low levels by ensuring that there is enough money if needed, and has credit available if needed to meet financial obligations. The company money on 31 December 2009 were EUR 224 million, amounts to 2,930.1 million Euro loan and Cosmote Group (which is part and AMC) has a term loan of 350 million Euros. For monitoring liquidity risk, the group prepares annual cash flows, in preparing the annual budget, monthly forecasts and performs cash flow for the next 3 months, in order to ensure that sufficient reserves of money to meet obligations its financial position.

c. Market risk

Market risk is the risk that fluctuations bring to the value of a company’s financial


instruments, due to changes in market prices, such as foreign exchange values, interest rates and stock prices. The objective of market risk management is to manage and control the company’s exposure within acceptable levels. Individual risks involved in market risk described below in detail as well as company policies for managing them.

d. Interest rate risk

Interest rate risk is the risk caused by interest payments on loans. Interest rate risk mainly applies only to long-term loans with variable interest rates. Protection against interest rate risk is managed through ownership of a combination of loans with fixed and floating rate and also through the use of interest rate agreements. On 31 December 2009, fixed rate loans to those floating on Cosmote were 91% / 9% (in 2008: 81% / 19%). Analysis of loans under the interest rate is shown in Table 1.

Table 18.1 — Analysis of loans 2008 to 2009 Cosmote Group. Source: AMC financial reports 2009.

In million eurosCosmote Group AMC

2008 2009 2008 2009The value of variable interests 1,099.3 503.3 0 0The value of fixed interest 4,948.4 4,918.6 3,307.1 2,930.1Total 6,047.7 5,421.9 3,307.1 2,930.1

Table 18.2 — Sensitivity to interest rates for Cosmote Group 2008 to 2009. Source: AMC Financial reports 2009.

In million eurosCosmote Group AMC

2008 2009 2008 2009Profit before taxes 3.3 4.7 3.5 2.2Stocks no info 3.0 no info no info

Table 2 shows the sensitivity to a possible change in interest rates on loans, deposits and derivatives in the income statement and stock. Sensitivity to interest rate increases by 1% if interest rates will be reduced with 1%, the impact will be similar and the opposite of the previous analysis. Due to the recent instability, observed in the capital and credit markets worldwide, debt approval to have incurred a reduction. Adverse changes in credit markets or lending rates could increase the cost of loans and banks may not wish to renew existing loans.

e. The foreign currency risk

Foreign currency risk is the risk caused by the use of foreign currency fluctuations and changes in foreign currency value Cosmote Group company, is part and AMC


operates in Eastern Europe and therefore exposed to currency risk due to differences between currencies. Cosmote main currencies are the Euro (Romania, Greece, Bulgaria) and Lek (Albania). Currency risk for Cosmote group is not very important.

f. Capital Management

The primary objective for the company’s capital management is to ensure that it hold a strong credit rate and stable rate of capital, in order to support its business and maximize value for shareholders. Company manages the capital structure and performs adjustments in order to follow changes in economic conditions. To hold or adjust the capital structure, the company may change the dividend payment to shareholders, return capital to its shareholders or issue new shares An important way of managing capital is to use the net debt ratio to the value of the stock, which is monitored at group level. Net debt includes loans with interest, money, cash and other financial assets.

The following table shows an increase of this ratio in 2009 compared to 2008 due to the reduction of cash equivalents, and also reduction in stock value due to losses in foreign exchange and purchase of interests controlled by the Albanian state, which was recorded in the value of shares.

Table 18.3 — Report net debt / value of shares of Cosmote Group, 2008-2009.

Net DebtIn million eurosCosmote Group

2008 2009Borrowings 6,047.7 5,421.9Cash money (1,427.8) (868.8)Other financial assets (135.9) (35.4)Net debt 4,484.0 4,517.7Shares 2,173.2 1,979.7Report 2.06 2.28

g. The impact of global crisis

Unfavorable macroeconomic conditions and the worsening global economic environment, as the economic crisis in the markets in which companies operate at a group level, may lead to reduction of demand by consumers for products and services of existing innovative products. In tough economic time’s conditions, consumers may seek to reduce costs by reducing use of products and services, including data services, or going into alternative lower cost offered by competitors. Similarly, under these conditions, the business group customers may delay their decisions to purchase services, can delay the full implementation of service offerings or reduce the use of company services. Furthermore, adverse economic conditions may lead to increased number of customers who can not afford to pay for existing or additional services. If you are in these conditions, can have adverse effects affecting the results of operations


of companies.h. Reduction of market share and revenue from increased competition

Leading companies in the Albanian market, AMC and Vodafone, are facing increasing competition and their ability to compete effectively, the main factors have to do with network quality, capacity and coverage, the price of services and facilities, quality of service to customers, developing new products and services in response to customer demands and changing technology, reach and quality of sales, distribution channels and capital resources.. Competition can lead to a reduction in rates at which the company adds new customers, a reduction in size of market share and a decline in ARPU index, because consumers choose to have telecommunications services or other competitive services by other operators. Examples include competition from the Internet-based services, offered by new companies in our market. The focus of competition continues to shift from customer acquisition to retention of the customer, while the market for mobile telephony has become very penetrative.

Inactivation of the numbers of consumers is measured by the departure rate. There is no assurance that the company should not prove an increase in departure rates to customers, especially in these times when we have great growth of competition. An increase in the rate of removal may adversely affect company profits because the company can prove reduction of sales revenue and additional costs to replace lost customers and regain lost revenues. Increased competition has led to low price wireless service and is expected to have other cuts in the future. Competition can also lead to an increase in subsidies to customers for purchase of mobile devices.

i. Licenses and new technologies

Companies have committed additional investment in the purchase of licenses for mobile networks and 3G networks. Companies are expected to continue to make investments in mobile network due to the increased use of mobile and need to offer new services and greater functionality powered by the new telecommunications technologies. Accordingly, the rate of capital expenditure in future years may remain high or exceed existing values. There is no certainty that the introduction of new services will continue under the schedules previously provided, or that the level of demand for new services to justify the cost of creating or providing new services. Failure or delay in networking and launch of new services, or increases in costs associated with these services, may have an opposing effect on company operations.

j. Health risks

Many countries have expressed concern about electromagnetic signals emitted by cell phones and transmission masts, which can pose health risks and may interfere with the operation of other electronic devices. Moreover, participants in this industry have been open trials about the health consequences as a result of mobile phone use, including brain cancer. While not yet proven that such health risks caused by electromagnetic waves, there is no assurance that the risks perceived by the public regarding the transmission of electromagnetic waves will affect the ability of companies to retain and attract new customers, to reduce the use of mobile equipment or bring other legal issues.


5 Recommendations and conclusionsStrategies that AMC could follow to be successful

While competition in the telecommunications market in becoming stronger, increase the purchasing power of consumers, and consumers have more choices. This will force prices down and service will lead to a price war between companies, influencing both the quality of service. The greatest danger occurs when companies focus only on prices and forget about quality and customer service. In the telecommunications industry, customer service and his loyalty are very important factors.

AMC should focus on customer service and product differentiation as an effective way to compete in the market. Telecommunications market, customer service offers more opportunities than other strategies, for a mobile operator, to differentiate from its competitors. AMC can be differentiated through sales representatives, service specific programs for different target groups, rapid response and meeting the requirements to subscribers. Lack of a customer service could result in over subscribers to other operators, who may have a better reputation. The more increase customer loyalty to a mobile operator, the harder it is his passing in another operator. In other words, when a customer is satisfied with the existing operator, the consumer is less willing to change service provider.

Therefore, AMC must maintain a good reputation there, communicating with its subscribers, and working hard in terms of customer service. Importance should be given the power of customers who have large contracts such as big companies that get more numbers from the same operator and generate huge revenue for the mobile operator. Also the cost leadership and differentiation strategies are good, but good study environment around the company. Generally known that the Albanian telecommunication market, phone prices have decreased with increasing competition.

Companies follow one another in pricing policy. And not all companies in our market can compete successfully by having the same strategy as that of cost leadership. However, differentiation can be achieved in several ways. According to Porter, the industry should have cost only a leader, but many companies have differentiated from each other. Although AMC is pursuing the strategy of lowering prices and also to cut operational costs of maintaining the network, greater focus is toward differentiation and customer service. Can be thought a combination of two strategies to offer a differentiated product that has a lower cost than other companies products and a higher cost than products that offer cost leader in the market.

AMC may use the network effect by offering lower prices for customers who are within AMC. When customers call outside the network, pay different prices are usually higher than calls within the network. In this case the customer is willing to pay more, if we have a large number of customers subscribed to the same network, because it wants to stay out of this great network. This strategy also creates positive effects when recruiting customers and other family members on the same network.


Since the services offered in this industry are similar, AMC should focus more towards differentiating its products and services. It is very important that AMC was the first company in the industry and has a large number of loyal customers, and should be the first to follow the directions to gain strategic advantage in the market. In this industry it is very easy to be copied and services first company to implement new services should take into account these factors. Since the strategy of “First-Mover” to be differentiated to succeed, AMC should not stop its operations for a moment, even if successful differentiation is present. Also, mqs products and services are easy to duplicate by competitors, it is very important to the company through core competencies to strengthen competitive advantages. AMC should not only reinforce core competencies as the application of latest technology, but also reinforce and lead professional processes. Steadily the company should recruit professional people who contribute to the success of the company. Also education and training of employees is very important to be in line with technological development of this industry.

6 ReferencesAKEP, Information on the Market: Mobile phones and Albtelecom, 2003-2008.

— Presentation of the indicators of the electronic communications market, Tirana, October 2010.

— Statistical indicators and overview of the electronic communications market in Albania, 2010.

The 2009 Ersnt & Young business risk report telecom, Ernst & Young, 2009.

Cosmote Group, Financial Yearly Report, 2009.

Vodafone Plc, Annual Financial Report, 2009.

Telecommunications snapshot survey, Ernst & Young, July 2009.

Exploring Corporate Strategy, 7th edition, G. Johnson, K. Scholes, R. Whittington, 2005.

The Telecommunication market in 2009, Intrum justitia, 2009.

Fundamentals of Risk Management, Paul Hopkin, 2010.

Financial Risk Management In An Integrated Framework, S. Mehmood & M. Zhang,

Blekinge School of Management, September 2010.

Corporate Finance, Theory and Practice, Pierre Vernimmen, 2009.

Fundamentals of Financial Management, 10th edition, Brigham & Houston.

Strategies in Telecommunications Industry during Privatization Process Towards

Competition, Th. Nilsson, U. Rosenqvist, Blekinge School of Management, 2005.

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Impact of financial crisis on the profitability of sme in the Republic of

Macedonia – pollog region

Rametulla Ferati,* Aida Yzeiri,** Elsana Ejupi***

Lector at the State University of Tetovo, Macedonia*PHD candidate, Tel:0038970278236, @: [email protected]

**PHD candidate, @: [email protected] ***Mr., @: [email protected]

AbstractSME play a significant role in all economies and are key agents of employment,

innovation and growth. A significant number of SME could use funds productively if they were available, but are often denied access to financing, thus impeding their creation, survival and growth. Although SME form a broad spectrum as far as their relative size, sector of activity, seniority, location and performance are concerned, there is a vital need for innovative solutions for their financing in particular for innovative and high growth SME in a globalised knowledge based economy.

Through this paper will try to explore the impact of financial crisis in the profitability of SME in the Republic of Macedonia- Pollog region. Given that Macedonia is a small country with an economy not quite developed, small enterprises and medium enterprises play a decisive role in economic development of this country.


The sample consist 150 SME operating in the Pollog region. The data used in empirical analysis are obtained from annual reports of business development. From the results of this paper is expected to highlight determinants that have the more impact in the profitability of businesses.

Key words: Financial crisis, profitability, SME, financing

1 IntroductionThe financial crisis that erupted in mid-2008 led to an expansion of public

debt in many economies of advanced countries. Governments were forced to make the capitalization of banks, take over a large debt to arise in the failure of financial institutions, and to introduce major incentive programs to revive demand. Involvement of the world economy from financial crisis was reflected very negatively on the economies of different countries, and once on business activities in general. Balkan region countries, which are part of Macedonia, are affected by this crisis, to what extent was the impact on them is relying specific macroeconomic conditions where countries are located, different levels of structural reforms carried out, and their exposure the crisis. At the beginning of the crisis impact on developing economies, in a way we can say that it was limited, (taking into account that the crisis started in developed economies), but this crisis was quickly transformed into a global economic crisis, which brought tremendous consequences in the real and financial sectors of the economy. Economic crisis, many countries included rapid (essentially businesses in the country), starting from the countries that generated the financial crisis (U.S.), European Union and beyond, which includes Macedonia itself. Economic sector in Macedonia comprise entirely of small and medium enterprises, who at the leading participation in economic growth and reducing unemployment. According to data available on 90% of the existing enterprises consist of small enterprises with about 15 employees. Macedonia as a small economy and open trade with an orientation towards Euro-zone countries was affected more rapid decline in foreign demand, and increase the rate of unemployment in some neighboring countries to the EU which caused a decrease in workers’ remittances, export reduction, reduction of foreign investment, etc., that these sources are treated as one of the most important to the economy of a whole region of Macedonia in particular. Precisely, the recession of the neighboring countries and the euro-zone countries (countries with which Macedonia has trade links) quickly affect the distribution of the effects of the crisis on local businesses and the immediate impact on trade exchange and balance of payment system. All these indicators quickly led to the destabilization of all other macroeconomic parameters, and that given the rising unemployment, shrinking monetary policy and thus decreased the growth rate of lending, and noted deterioration of credit quality. Therefore, these tight financial conditions will influence the activities of businesses and business financing structure in the short and medium term. Therefore, businesses now began to feel the weakening of their liquidity, the mere fact of financial tightening,

Rametulla Ferati,* Aida Yzeiri,** Elsana Ejupi*** 215

primarily from the impossibility of obtaining credit through banks and reduction in financial market activities.

In this work we have items cross-sectional analysis which is taken into account these variables: liquidity, profitability, financial leverage, fixed assets, profitability, employees, liabilities of the firm, etc... In our case all the variables included in the analysis showed significant which means that all have an impact on the liquidity of the business structure, which in essence represents the research answered the question which are the determinants affecting the liquidity of businesses in the region and beyond. Simultaneously with this we get the answer to the question that are the attributes involved in the heterogeneity of the variables relations between dependent and independent variables. The sample consists of 150 companies operating in the Pollog region. The data used in empirical analysis are obtained from annual reports of business development in the region in question.

2 Literature reviewSME play a particularly important role in economic development: SMEs generate

a disproportionate share of job opportunities; SMEs contribute substantively to the gross Domestic Product (GDP); and SMEs spur innovation. Prior to the global financial crisis, SMEs already faced multiple obstacles.

In recent years there has been an increased focus on the relationship between firm’s strategic orientation and firm performance (Madsen, 2007). Prior studies have generally found a positive relationship between EO (entrepreneurial orientation) and firm performance (Madsen, 2007; Wiklund & Shephe-rd, 2005; Jantunen et al, 2005). However, there are also studies where such a relationship has not been found (Smart & Conant, 1994). Typically, the measure that has been used to assess the firm performance has been a combination of both profitability measures and growth measures (Avlonitis & Salavou, 2007; Wiklund, 1999; Covin & Slevin, 1989).

Liquidity is a very important economic category, even if we examine the macro or micro economic. If may be said that liquidity is fat, which facilitates the smooth functioning of financial markets (in the macro sense) and the mechanism of the existence of long-term stage companies in the micro sense, hence the lack of liquidity is a form of friction in the system (Stoll, 2000). Thus, the negative effects of lack of liquidity can be harmful, especially the value of assets, demonstrated by (Amihud and Mendelson, 1986). Also, in the period leading cause of lack of liquidity was the presentation of the crisis in financial markets.

J. Alan Taub investigated the relationship between variables that explain the influence of various factors in business decision making regarding financing activity. For this purpose, the author considered the sample of 89 firms for 10 years, from year 1960 to 1969. For empirical treatment was used to model two types of tests: the test of probability and t - test. Empirical results show that the differences between the returns


of the firm and the interest rate on long term and firm size that have shown positive influence on the debt to equity ratio. The uncertainty of the firm’s income is shown to have negative impact on the debt to equity ratio. Results for the remaining variables were contrary to expectations.

Fakher Buferna, Kenbata Bangassa and Lynn Hodgkinson (2005) provided empirical evidence for theories of capital structure that firm of developed countries. Independent variables were financial leverage report and explanatory variables were firm size, firm growth opportunities, and debt ratio of firm assets and profitability of the firm. The sample of this research was based on 5 years by treating the data from 1995 to 1999 for 55 companies. Theory and empirical evidence suggest that deep economic crises have profound effects on firms, but the effects are uneven between the firms (Narjoko & Hill, 2007). In this framework it is essential to further investigate if there are some firm specific strategic factors that enable SMEs to bear better this kind of challenging changes in the surrounding environment. Economic recessions and firms in these harsh environments have offered a fruitful setting for researchers for decades. An ample strand of literature called the turnaround strategy literature (e.g. Pearce II & Robbins, 1994; Laitinen, 2000; Cater & Schwab, 2008; Naidoo, 2010) has focused on firms’ strategies used to survive and meet the performance targets during recessionary periods of time. Some of these turnaround strategies resemble very closely the dimensions of the entrepreneurial orientation, and therefore, we are interested to see if the entrepreneurial orientation has a positive effect on firms struggling to overcome the recession.

Empirical studies find mixed evidence. Wiwattanakantang (1999), Booth et al. (2001), Pandey (2001), Al-Sakran (2001), and Huang and Song (2002) find a significant positive relationship between leverage ratios and size in developing countries. While Rajan and Zingales (1995) find a positive relationship between size and leverage in G-7 countries, Titman and Wessels (1988) report a positive correlation between the size of the firm and the total debt ratio and the long-term debt ratio. On the other hand, Bevan and Danbolt (2002) report that size is found to be negatively related to short-term debt and positively related to long-term debt.

Theory and empirical evidence suggest that deep economic crises have profound effects on firms, but the effects are uneven between the firms (Narjoko & Hill, 2007). In this framework it is essential to further investigate if there are some firm specific strategic factors that enable SMEs to bear better this kind of challenging changes in the surrounding environment. Economic recessions and firms in these harsh environments have offered a fruitful setting for researchers for decades. An ample strand of literature called the turnaround strategy literature (e.g. Pearce II & Robbins, 1994; Laitinen, 2000; Cater & Schwab, 2008; Naidoo, 2010) has focused on firms’ strategies used to survive and meet the performance targets during recessionary periods of time. Some of these turnaround strategies resemble very closely the dimensions of the entrepreneurial orientation, and therefore, we are interested to see if the entrepreneurial orientation has a positive effect on firms struggling to overcome the recession.


Table 19.1 — Macroeconomic indicators in Republic of Macedonia. Source: www.Economywatch.com.

Indicator 2010 2009 2008 2007 2006 2005 2004 2003GDP Growth (Constant Prices, National Currency) for Macedonia 3.97 3.98 4.01 4.2 3.65 3 0.7 -0.9GDP (Current Prices, National Currency) for Macedonia, (billion) 641.6 605.4 563.2 521.5 488.8 454.6 423.9 409Inflation, Average Consumer Prices (Indexed to Year 2000) for Macedonia, in other Years 116.5 114.3 112.2 110.2 108.1 106 100.8 99.3Total Government Gross Debt (National Currency) for Macedonia, in other Years (billion) 166.7 158.3 148.6 141.4 133.8 121.9 105.2 97.9Inflation (End of Year Change %) for Macedonia, in other Years 1.9 1.8 1.8 1.9 2 7.5 2.96 -1.64

The table shows that GDP from 2003 until 2008 is trend to rice, where in 2009 this trend reduced from 4.1% to 3.98% and in 2010 reduced to 3.97%. All this are results of financial crisis that came over the world economy. Also another important indicator of Macedonian economy is public debt. Public debt rose from 97.86 billion denar in 2003 to 166.68 billion denar in 2010. These indicators tell us about the state of Macedonian economy through the years. As we see all indicators point to the deplorable situation of the Macedonian economy and thereby also to SMEs operating in the country.

3 Effects of the economic crisis in Greece on the Macedonian economy

Macedonia as a small open economy, cannot achieve good growth rates and to operate successfully isolated from its environment (foreign trading partners and investors). Therefore, the various shocks in the environment which is important for our economy are easily transmitted as a spiral in our economy. The reduction in economic activity the most important trade partners of Macedonia negatively affect foreign effective demand, which in 2009 was the deepest historical decline of 3.7%.

Effective demand by Greece is far less than the total foreign effective demand of Macedonia. In the period 2010 - 2011 years. Has noticed a clear distinction between foreign effective demand and foreign effective demand without Greece, it can be concluded that the reduced effective demand by Greece will lead to reduction of total


foreign effective demand but the effects of reduced effective demand by Greece have small and less significant effects on total foreign effective demand.

Deep economic crisis that is currently shaking our neighbor R. Greece has emerged as a new variable in the prediction and planning of economic activity barked loudly with all the economic variables in the Macedonian economy. The dominant part of the analysis will focus on determining the future effects of the economic crisis on Greece: foreign effective demand of Macedonia (exports and trade trends), flows of foreign direct investment and other direct and indirect effects (effects on GDP, the exchange rate and foreign exchange reserves, the banking sector, etc.).

4 Methodology of researchThis research paper investigates the impact of financial crisis in profitability of small

and medium enterprises that operate in the region of Pollog. In this study we treated 150 firms of various activities, classified as small and medium enterprises according to law in force that defines the activity of firms in the real sector of economy. The necessary data, which are used in this work are the financial reports provided by the respective firms. We define these research important determinants of decisions related to capital structure. The methodology used in this paper is built on the basis of the methodology that the small amount of squares, using data to cross. This methodology enables that through multivariable regression analysis, to analyze the effects of different variables that affect business decision, on the basis that the capital structure and liquidity. So the main purpose of this methodology is ; the small amount of squares to be applied through regression analysis that multivariable change is forecast to average depended variables (profitability), as a result of unit change in explanatory variables.

In order to analyze how the financial crisis has affected on the profitability of SMEs in the Pollog region so we use regression analysis for 2008, 2009 and 2010.

4.1 Empirical Analysis

For our quantitative analysis we used the correlation between variables and regression analysis. Correlation between variables will help us to measure the association between explanatory variables and their association with pendant variable. Correlation is calculated for all explanatory variables. Regression analysis is used to accurately measure the individual effect of explanatory variables in the relation between variable and their hangers.

4.2 Analysis of descriptive data

Determinants of capital structure of small firms and medium of Pollog region are studied individually, through the calculation of the maximum, minimum, average,


standard deviation and standard error. Descriptive analyses were conducted in order to assistant and empirical analysis to support the findings of empirical analysis. Table 2 shows that there are negative values for minimum values, for e.g. observe any of the firms has operated at a loss during the fiscal year.

Table 19.2 — Descriptive statistics.

Variable N Minimum Maximum Mean Standard Deviation

Profitability 2008 150 -5.1619 1.3268 0.0097 0.0414ROA 2008 150 -0.3182 1.9186 0.0828 0.0186ROE 2008 150 -9.3378 11.5774 0.1437 0.1117LN Age 2008 150 0.0000 2.30255 1.9581 0.0554LN Size 2008 150 0.0000 19.3300 12.5246 0.4004LN Liability 2008 Liability/Assets

150 0.0000 23.3478 1.13489 0.21345

Profitability 2009 150 -13.786 1.3268 -91.867 91.910ROA 2009 150 -0.3949 1.9186 0.1090 0.0205ROE 2009 150 -8.1334 11.5773 0.2841 0.1256LN Age 2009 150 0.0000 2.3025 1.9581 0.0554LN Size 2009 150 0.0000 19.4275 13.5167 0.2991LN Liability 2009 Liability/Assets

150

Profitability 2010 150 -5.1619 1.32686 0.04340 0.0423ROA 2010 150 -0.3182 1.91867 0.1110 0.0203ROE 2010 150 -3.0586 11.5773 0.3377 0.11229LN Age 2010 150 0.0000 2.30258 1.95810 0.05543LN Size 2010 150 0.000 19.4519 13.6951 0.27561LN Liability 2010 Liability/Assets

150 -3.3234 2.64364 -0.4830 0.07419

Table 19.3 — Regression analysis.

Coefficient Standard deviation t P

Profitability 2008 -0.0187 0.1285 -0.1455 0.8845 -0.2727 0.2353ROA 2008 0.8674 0.1697 5.1123 0.0000 0.5320 1.2027ROE 2008 -0.0545 0.0286 -1.9060 0.0586 -0.1109 0.0020LN Age 2008 -0.0715 0.0653 -1.0950 0.2754 -0.2004 0.0575LN Size 2008 0.0090 0.0089 1.0091 0.3146 -0.0086 0.0267LN Liability 2008 Liability/Assets 0.0250 0.0432 0.5783 0.5640 -0.0604 0.1104ROA 2008 -0.0187 0.1285 -0.1455 0.8845 -0.2727 0.2353Multiple R= 0.426 R Square =0.1819 Adjusted R Square=0.1534


Profitability 2009 -1.0675 0.4657 -2.2922 0.0234 -1.9880 -0.1469ROA 2009 1.3149 0.3919 3.3556 0.0010 0.5403 2.0895ROE 2009 -0.0086 0.0704 -0.1227 0.9025 -0.1478 0.1305LN Age 2009 -0.1621 0.1411 -1.1483 0.2528 -0.4410 0.1169LN Size 2009 0.0828 0.0266 3.1130 0.0022 0.0302 0.1353LN Liability 2009 Liability/Assets -0.0652 0.1496 -0.4357 0.6637 -0.3610 0.2306ROA 2009 0.0452 0.0820 0.5510 0.5825 -0.1169 0.2073Multiple R= 0.392 R Square =0.1593 Adjusted R Square=0.1241Profitability 2010 -0.0535 0.1934 -0.2764 0.7827 -0.4358 0.3289ROA 2010 0.8284 0.1625 5.0985 0.0000 0.5072 1.1496ROE 2010 -0.0362 0.0291 -1.2439 0.2156 -0.0936 0.0213LN Age 2010 -0.0683 0.0583 -1.1705 0.2437 -0.1835 0.0470LN Size 2010 0.0130 0.0113 1.1468 0.2534 -0.0094 0.0353LN Liability 2010 Liability/Assets 0.0385 0.0628 0.6133 0.5407 -0.0856 0.1626ROA 2010 -0.0535 0.1934 -0.2764 0.7827 -0.4358 0.3289Multiple R= 0.423 R Square =0.1789 Adjusted R Square=0.1445

5 ConclusionThe results of multiple linear regressions with financial performance indicators as

dependent variables are shown in Table 3. In these regression models we predict the financials of 2009 15 using the 2008 values as control variables and EO dimensions as independent variables. The models for the two volume indicators (operating revenue and total assets) give very similar results. The R squares are above 0.18, the lagged financial indicator has a positive coefficient with a very large t-value, and innovativeness/proactiveness dimension has a significant positive effect while risk-taking is not significant. Thus, the more innovative and proactive firms have suffered less in terms of the operations volume. The profitability models are also significant but the R squares are somewhat lower than in the volume models. The profitability measures are largely dependent on the previous year’s values, but to a notably lesser extent than the volume measures. Risk-taking has negative effects which are significant or close to significance. That means that the more risk taking a company is, the more its liquidity and profitability have decreased during the crisis.

From the results of the regression analysis we saw that all coefficients are statistically different from zero (statistical significance), thus increase the explanatory power of the model.

From the regression analysis shows that the profitability coefficient has changed from year to year, in 2008 this coefficient was -0,0187 in 2009 was reduced in 2010 -1,067 and -0,053. So according to above mentioned analysis we can conclude that the


profitability of enterprises in 2009 was lower due to the financial crisis that conquered Macedonia. From the regression analysis shows that variables return on assets (ROA) in the three years has greater statistical significance.

Spondents in 2008 and ROA of 1% will indicate in increasing the profitability of 0, 86%. In 2009 this ratio varies from 1% a pendants, the ROA will impact on increasing the profitability of 1,31% and in 2010 the ROA of 1% will affect the growth and profitability by 0,828%. From all regression analysis to conclude that the financial situation of enterprises in the Pollog region weren’t immune to the financial crisis.

Worst situation is observed had noticed in 2009 where the coefficient of profitability has been lower. ROA was obtained as the ratio between profits and assets of the company. Increase ROA in 2009 is the result of non distributions of profit to the utilities. Non-distribution of profit was the result of panic of enterprises from the financial crisis on the one hand, while on the other hand was a result of changing the law on profit tax in the Republic of Macedonia. According to legal changes, enterprises can not distribute profits also they are not obliged to pay tax. Also, it was the cause which motivated the enterprises to accumulate profit made.

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Narjoko, D,, and H, Hill (2007), “Winners and Losers during a Deep Economic Crisis: Firm-level Evidence from Indonesian Manufacturing,” Asian Economic Journal, 21 (4), 343-368.

Pandey, M., 2001. Capital structure and the firm characteristics: evidence from an emerging market, Working paper, Indian Institute of Management Ahmedabad

Pearce II, J, A,, and K, Robbins (1994), “Entrepreneurial Recovery Strategies of Small Mar-ket Share Manufacturers,” Journal of Business Venturing, 9, 91-108.

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Wiwattanakantang, Y., 1999. An empirical study on the determinants of the capital structure of Thai firms, Pacific-Basin Finance Journal 7,371-403.

RISK

OBJECTIVE

MA

NA

GE

When to Retire, how is Recessions helping this process and how is the Social Security

affected by early retirement

Fetije Gjaku-Murturi,* Mustafë Murturi**

*Prof. Dr. Assoc.**PhD. Candidate

Abstract Within the context of slow growth in recent years and fiscal pressures, Kosovo faces

the complex dual challenges of high unemployment and weak human development outcomes. Promoting the “jobs agenda” and strengthening human capital rank high among priorities for Kosovo’s development. Although the market still may be below what individuals had expected and there may have been some short-term impacts, the market’s sharp rise has substantially diminished the importance of this part of the story. The weakness in the labor market, however, continues to be extensive and persistent. On the other hand the economic crisis that began in 2008 had multiple implications for retirement behavior. The stock market crash may have caused some individuals to defer retirement because of losses they experienced in their retirement plans. The purpose of this analysis is to focus on its implications for retirement and retiree well-being in the coming years. High unemployment has the potential to significantly alter the well-being of older workers, both in the present and for


the remainder of their lives. If an older worker loses his or her job, finding a new one may be even more difficult than it is for a younger worker. The older worker’s relatively short time horizon in the labor force may reduce their own or a prospective employer’s willingness to invest in additional human capital. If specific capital has been lost, the wage a new employer may offer may be considerably below the worker’s previous wage, reducing the likelihood of an offer being extended or accepted. For these reasons and others, the future employment prospects of a laid off older worker may be bleak.

In such an environment, Social Security benefits may be a lifeline for these workers. But while taking up benefits when they first become available at age 62 may help a laid off older worker pay the bills, it also means reduced income for the remainder of the worker’s life, since monthly benefits are reduced (increased) for early (late) claiming so as to provide roughly the same expected lifetime benefits regardless of the age at which benefits are claimed. The negative impact of early claiming on retiree well-being may be particularly pronounced for low socioeconomic status individuals, who rely heavily on Social Security to make ends meet. The purpose of this paper is to examine the impact of labor market fluctuations on the retirement behavior and Social Security income of older individuals. Specifically, we use 10 years of data from the AFP (Anaketa e fuqise puntore) to measure the impact of a weak labor market on the labor force status and Social Security receipt of individuals between the ages of 55 and 69.

We also use data from the 2001 Census and 2001, 2002, and 2006-2009 Entit të Statistikavës së Kosovës (ESK) to examine whether labor market conditions around the time of retirement affect the subsequent income of retirees in their 70s. We find support for the notion that workers are more likely to leave the labor force, to collect Social Security earlier, and to have lower Social Security retirement income later in life when they face a recession around the time of retirement. The impact of such an event is greatest for the less-educated, who are more susceptible to job loss and rely more heavily on Social Security to support them in retirement.

1 IntroductionBefore the 1998 conflict, Kosovo was covered by the Yugoslav pension system. This

was a “pay-as-you-go” (PAYG) system in which current workers made contributions to the pension fund, and those contributions were used to pay benefits to current pensioners. Pension levels were determined by a benefit formula based on years of service and salary level. Until 1989, Kosovo had an autonomous pension fund that collected contributions and paid benefits. In 1989, these functions were centralized to Belgrade, and the regional Kosovo fund was disbanded. Many Kosovar workers were excluded from the system as of 1989 when they were removed from formal-sector labor positions. From the beginning of the conflict, Belgrade ceased paying pensions to most past contributors.

Fetije Gjaku-Murturi,* Mustafë Murturi** 225

After the conflict ended, UNMIK began a social assistance program that included

payments to certain categories of elderly on a needs-tested basis. These payments to elderly did not cover a large share of the older population, mostly did not go to those who made past contributions, and were seen as social assistance rather than pension benefits.

During 2001-2003, a fundamentally new pension system was designed and implemented in Kosovo. The system has three components, or “pillars.” Pillar I is comprised of an old-age “basic pension” (paid to all Kosovars, 65 years of age and older) and a disability pension, both of which are funded from general revenues rather than an earmarked wage tax. Pensions are paid through the banking system rather than through the postal service, reducing administrative costs. The disability pension is narrowly focused on total and permanent disability, ensuring that scarce resources are well focused on the truly disabled.

Pillar II of the system is a mandatory, defined-contribution, savings pension program. The program requires all working, habitual residents of Kosovo to contribute 5% of gross salary, matched by a 5% employer contribution. Contributions and records are managed by the Kosovo Pension Savings Trust (KPST), an independent body with strong governance and supervision, established solely for the purpose of administering the savings component of the pension system. The KPST invests participants’ assets abroad, through major European asset managers. There are no legal requirements or restrictions on overseas or domestic investment, though high standards are set for the security of instruments. KPST participant assets surpassed Euro 100 million in early 2005 and reached Euro 200 million late in 2006. Collections are centralized to minimize administrative fees.

Pillar III of the system provides for supplemental, individual or employer-sponsored pension schemes. The Banking and Payments Authority of Kosovo (the BPK—Kosovo’s equivalent of a central bank) licenses and regulates all third-pillar pension schemes. The BPK also regulates the KPST. Demographic data suggested that the number of individuals over 65 was approximately twice the number over 65 and receiving pensions. That is, the coverage rate of the old pension system was quite low, reaching roughly half of the elderly population.

Consideration had to be given to those who were receiving pensions before the conflict and those who had contributed but not yet reached pension age. The main source of data for both of these categories was a set of databases maintained by the people who had led the Kosovo Pension and Invalidity Fund. At the time of the reform, these people worked in the Pension Section of the Kosovo Social Insurance Fund, within the UNMIK Department of Health and Social Welfare. They had data on individuals who were receiving pensions as of December 1998 and on individuals who were still working at that time, and had made contributions to the system. In general, the data available on those who already were receiving pensions was of better quality than the data on those who were still contributing to the system before the conflict.

For each former pensioner, a record existed in a computer database (programmed


in Unix on a PC) that included birthdate, address (perhaps not current), and other personal information. Information was also available regarding the pension levels and expenditures for various programs. Much of the information on birthdates had been added by the employees of the central Social Insurance Fund, who contacted regional offices in the initial years after the conflict. This suggested that the quality of the data for former pensioners was relatively high since they seemed able to reconstruct a comprehensive database using existing records.1

Furthermore, the Kosovo Social Assistance Program was introduced in 2001 with the goal of supporting the poorest segments2 of the population by providing cash benefits. Two categories of poor families are currently being supported: (i) those without any member of the family capable of working, and (ii) those with only one member capable of working, but who is registered as unemployed with the PES of the Ministry of Labor & Social Welfare (MLSW) and is actively seeking work, and with at least one child under the age of 5 or an orphan under the age of 15. The level of the benefit depends on the other resources of the family and on the size of the family, ranging from €35 to €75 monthly, with the average being €52. Currently 37,392 families are receiving benefits, which cover a total of 161,863 individuals. The benefit was supposed to have been indexed to inflation but has not been increased since it was initially converted to Euros in 2003. The pension system as it currently stands represents a reasonably optimal mix of providing a minimum subsistence level to all elderly, irrespective of contributor status.3

It is important to maintain these features given the high degree of informality in the labor markets and a defined contribution savings-oriented system designed

1 Richard Hitz, Asta Ziniene ,Sergity Biletsy and Tatyana Bogomolova,”the impact of the financial Crisis on the Public Pension System:Stress testing Models of Mandatory Pension System in Middle Income and Development Contries”, Social Protection Disscation Paper ,World Bank ,Sep.2009

2 Based on the latest poverty assessment for Kosovo (World Bank, 2007), almost 15 percent of the population is estimated to be extremely poor and unable to meet basic nutritional needs, while 45 percent consume below the poverty line.

3 The pension program in Kosovo provides benefits to all individuals at the age of 65 and above, irrespective of previous contribution history, at the current level of Euro 40 per month. This benefit, which has been fixed since 2005, is provided to 128,000 people. In addition, formal sector workers and their employers aged 55 and younger in 2002 are required to contribute 5 percent of wage each to an individual account with the Kosovo Pension Savings Trust (KPST), an autonomous public entity which manages retirement savings by investing the money with internationally recruited asset managers and provides payments either by lump sum or as periodic withdrawals when they retire or become disabled. Beginning in 2008, the government decided to acknowledge those who had contributed to the former Yugoslavian pension system by providing 75 per month instead of the €40 to those who could prove that they had contributed 15 years or more under the former system. The Government is still accepting applications for this increased pension, but estimates that only 35,000 of the total beneficiaries will qualify on the basis that there were 33,800 old age pensioners in 1998 and that 1,700 applications were still being processed. Until March 2008, 26,767 applications have been received for the increased benefit, with 21,000 of them already certified for payment in April 2008.


to provide additional benefits to current workers when they retire. The poverty assessment completed by the World Bank in 2007 shows that the first component of the pension system has had an important role in reducing both extreme poverty and absolute poverty, even more than the means-tested social assistance program. The second component of the pension system is designed to provide additional future benefits to current workers without imposing further liabilities on the Government and with appropriately low contribution rates, given the high rate of unemployment in the economy.

In summary, at the moment reforms were designed, there existed some data on past recipients, and less on past contributors who had not reached pension age, leading some to advocate re-creating the old Yugoslav pension system based on a belief that sufficient information existed to re-establish contribution histories. Instead, a dramatically different approach was followed.

2 Data and methods We rely on 4 years of data (2003-2006) from the beginning of the year collected

by SOK and World Bank Estimates using 2003-2006 LFS data in our analysis of labor market conditions on labor force status and Social Security receipt. The SOK is the leading survey institution of collecting the labor market activity in the Republic of Kosova. The monthly SOK survey asks questions about the respondent’s involvement in the labor market around the time of survey and collects demographic data. In March of each year, a supplement is administered that includes questions about income receipt, including from Social Security, in the preceding calendar year. Each March SOK provides sample sizes of 130,000 to 215,000. We focus on those between the ages of 55 and 69. As we describe subsequently, to be consistent with our analysis of the Census/LFS data, we also restrict the sample to men. This leaves us with a final sample size of 292,093 men ages 55 to 69 over the period 2003 through 2009. Our analysis of retirement income for individuals in their 70s relies on data from the 2000 Census and the 2001, 2002, and 2006-2009 Statistics Office of Kosova (SOK).4

Kosovo is confronting many complex economic challenges. While estimated GDP growth picked up modestly from 2 percent in 2005 to 4.4 percent in 2007, Kosovo remains the slowest growing economy in Southeast Europe. It is also the poorest economy in the sub-region, with an estimated per capita GDP of only €1,573 in 2007. CPI inflation, which had remained negligible until 2006, has recently accelerated to

4 Recent amendments to the social assistance law have been presented to Parliament, including measures to simplify administration, which could free up some fiscal space and allow the Ministry of Labor and Social Welfare to increase the level of benefits paid. The proposed increase is €5 per month per family so that the available benefits will now range from €40 per month to €80 per month, depending on the number of individuals in the household. For the minimum benefit, this increase represents no more than the cumulative increase in the cost of living since the benefit was first established, but for the larger households, the flat increase of €5 per month does not even cover the cumulative inflation.


over 10 percent, largely fueled by the impact of higher global food and energy prices. With a limited export base, Kosovo relies heavily on donor assistance, spending by foreigners present in Kosovo, and remittances to finance its massive trade deficit. Despite a relatively low overall tax burden and rates of labor taxation, informal employment remains significant. Regarding labor costs, wage and income tax levels are relatively modest, although high relative to labor productivity comparators with neighboring countries. In 2006 the average monthly salary was Euro 236, and income tax on average wage levels was only 5 percent. The pension system consists of a tax-financed basic pension with a requirement that employers and employees each contribute 5 percent of gross wages to a retirement savings account, which results in a relatively low level of labor taxes compared to neighboring countries. Kosovo is not encumbered with excessively burdensome minimum wage laws. Taxes in Kosovo are low compared to neighboring countries. Kosovo has a simple and quick business registration procedure that takes only three days to process. It is vital that Kosovo does not undermine any of these advantages through inappropriate policies. (Ruggles, et al., 2009).

We place three sample restrictions on our data. First, our focus is on retirement income, so we restrict the sample to those individuals who have already left the labor force. This is not a major constraint given the age composition of the sample. More importantly, we restrict our attention to the incomes of men. We do so because women in these birth cohorts are likely to receive Social Security payments based on Law and the right in to the social assistance of 40 Euros per month , either because they do not qualify for retired worker benefits or because their dependent spouse receives working . It will thus be the market conditions present around the time that the husband retired that matter, but for those women who have become widowed, we have no data on the age of the husband. Finally, we focus our attention on those who report some income from Social Security. With over 90 percent of respondents in their 70s in this category, those who report no such income are likely not eligible to receive it, so their income from this source would not be altered by labor market conditions. We are left with a final sample of 22.520 men ages 70 to 79.Our statistical models are identified based on the differing historical experiences of individuals born into different birth cohorts. In essence, we treat labor market conditions around the time of retirement as a draw that is randomly assigned to individuals. In our analysis of labor force status and Social Security receipt using March CPS data, the availability of state-level data on labor market conditions enables us to implement traditional quasi-experimental methods in regression models that include both state and year fixed effects along with age fixed effects to control for differential patterns in outcomes by age. We estimate linear probability models where the outcome variables indicate whether an individual is out of the labor force and whether he is collecting Social Security benefits as a function of the state unemployment rate in the preceding calendar year (to allow for the change in labor force status to have occurred by the survey date), holding constant these fixed effects along with demographic characteristics (race/ethnicity, marital status, educational attainment).

Because the availability of Social Security benefits at age 65 suggests that responses


to a weak labor market may differ by age, we interact the unemployment rate with a series of categorical age variables. It is our hypothesis that individuals will be more likely to withdraw from the labor force in response to a recession if they are at least 62 years old. Moreover, any impact on Social Security receipt should not begin until that age since retirement benefits are not available before then.5

Our models of income for retirees in their 70s similarly rely on the plausibly exogenous variation generated by whether an individual is unlucky enough to approach retirement age during a recession. We estimate regression models where the dependent variable is the natural log of Social Security income and the key explanatory variables are the average historical unemployment rates at earlier ages (55-57, 58-59, 60-61, 62-64, and 65-69). The unemployment rates that an individual experienced can almost be thought of as a historical accident. Along with these unemployment rates, we also control for the contemporaneous unemployment rate and state, age, and survey year fixed effects. The idea is to see if labor market conditions around the time of retirement (and we are agnostic regarding exactly what that age is) affect the income of retirees ten or so years later.

3 ResultsTable 1 presents the results of our analysis of March CPS data examining the

impact of labor market conditions on labor force status and Social Security receipt. The top panel of the table focuses on the likelihood that men between the ages of 55 and 69 have dropped out of the labor force. We examine this outcome for all men in this age group as well as for sub-samples by level of educational attainment (high school dropouts, high school graduates, and those who have attended any college regardless of whether or not they have graduated). Each model interacts last year’s annual average unemployment rate with a set of age categories to assess whether labor market conditions have a differential impact on labor force status at different ages. The base group for this comparison is men aged 55 to 57, so these interactions can be interpreted as the differential impact of unemployment on the specified age group relative to this younger group. Since the younger group is less likely to have retired, it serves as something like a control group that can capture the broader link between aggregate labor market conditions and an individual’s labor force status, abstracting from the impact on retirement. The results indicate that a higher unemployment rate leads to a greater probability of withdrawal from the labor force (retirement) as workers age, particularly after age 62 when Social Security benefits are available.

5 The impact may begin somewhat before age 65 because the survey does not distinguish whether Social Security receipt is attributable to retirement or disability. Autor and Duggan (2003) have shown that some older individuals rely on Social Security disability benefits to provide income support when times are tough. The impact may begin somewhat before age 65 because the survey does not distinguish whether Social Security receipt is attributable to retirement or disability. Autor and Duggan (2003) have shown that some older individuals rely on Social Security disability benefits to provide income support when times are tough.


A one percentage point increase in the unemployment rate is estimated to increase the number of 62 to 64 and 65 to 69 year old workers who are out of the labor force by over a full percentage point. The effects are stronger for high school dropouts and high school graduates than for those with at least some college education. The p-value on a test of the equality of coefficients at ages 62-64 across groups is 5.7 percent. We find similar patterns when we focus our attention on the likelihood of Social Security receipt in the lower panel of the table. Again, a higher unemployment rate increases Social Security receipt beginning at age 62 and mainly for workers in the two lower educational attainment groups. Interestingly, the magnitude of the effect at ages 62-64 is larger than it is at ages 65-69 for Social Security receipt, but that is not true for labor force status. A plausible explanation for this is that as workers age into their late 60s, they commence receipt of Social Security benefits regardless of their labor force status, lessening the importance of labor market fluctuations on receipt at those older ages.

Table 20.1 — Impact of Labor Market Conditions on Older Workers’ Labor Force and Social Security Receipt (standard errors in parentheses)

AllHigh School

High School

Attended/Completed

Dropouts Graduates CollageOutcome : Out of Labor Force

Unemployment rate age 58-59 0.187 0.114 0.338 -0.22-0.118 -0.216 -0.336 0.18

Unemployment rate age 60-61 0.315 0.187 0.541 0.091-0.21 -0.21 -0.158 -0.235



Outcome : social security receipt

Unemployment rate age 58-59 0.161 0.159 -0.127 -0.119-0.152 -0.197 -0.121 -0.124

Unemployment rate age 60-61 0.192 0.457 -0.142 0.172-0.163 -0.269 -0.162 -0.175

Unemployment rate age 62-64 0.962 1.064 0.937 0.065-0.193 0.286 -0.297 -0.204

Unemployment rate age 65-69 0.321 1.032 0.419 -0.718-0.137 -0.241 -0.199 -0.296

#obs.

Notes: All estimates come from linear probability models that also include the current and lagged annual unemployment rate without age interactions, race/ethnicity, marital status, and exact age, state of residence, and year fixed effects. Reported coefficients are multiplied by 100. Standard errors are clustered at the state level.


Table 20.2 reports the results of our analysis of the effect of labor market conditions around the time of retirement on the income of retired men ages 70 to 79. We focus on income received from Social Security in the top panel and on total personal income in the bottom panel. In both cases, we report coefficients on the historical unemployment rates that these individuals experienced in their late 50s through their 60s, using the average rate at specified ages. Models are estimated for all men and for sub-samples by level of educational attainment.

The results suggest that experiencing a recession in the years leading up to retirement lowers subsequent retirement income. This finding is particularly evident for Social Security income, for less educated workers, and for labor market events that take place at or after age 62. Overall, experiencing a one percentage point increase in the unemployment rate at ages 62-64 reduces income from Social Security by 0.209 percent. We interpret this magnitude subsequently. As anticipated, the effect of unemployment at ages 62-64 on retiree income falls as education rises, although imprecision prevents us from rejecting the null hypothesis that the coefficients are equal. One puzzling finding in this table is that higher unemployment at ages 65-69 is associated with significantly higher Social Security benefits for retired men in their 70s.

Although we have no specific explanation for this finding, we are at least somewhat comforted by the fact that the coefficient for high school dropouts is small and statistically insignificant.

When we focus on total income, we find that the only significant effect of historical unemployment on subsequent retiree income is the effect of unemployment at ages 60 to 61 for high school dropouts. That coefficient has a p-value of .085. The equivalent coefficient for age 62-64 unemployment is of a comparable magnitude, but it is not quite significant at even the 10 percent level. Overall, the findings from Table 2 provide some support for our hypotheses, but they are not as strong as they could be.

A final way to interpret these findings is by assessing whether the magnitude of the coefficients is reasonable. To address this, we can combine results from the bottom panel of Table 1 regarding Social Security receipt around retirement age and the top panel of Table 2 regarding Social Security income for workers in retirement. Consider, for instance, the impact of a one percentage point increase in the unemployment rate at ages 62-64 for high school dropouts. The results in Table 20.1 suggest that they would be 1.064 percentage points more likely to receive Social Security at that age.

The results in Table 20.2 suggest that subsequent Social Security income in retirement is estimated to fall by 0.065 percentage points. If that one point increase in unemployment led 1.064 percent more workers to collect Social Security at ages 62-64 and that change led to a 0.065 percent reduction in aggregate receipt of Social Security income, then this suggests that the average worker who began Social Security receipt as a result of the increase in unemployment experienced a 25 percent reduction (0.274/1.064 = 0.257) in Social Security benefits. A similar analysis for high school graduates indicates that the average incremental Social Security recipient would face a 53 percent benefit reduction. To put these estimates in perspective, for individuals


in these birth cohorts, claiming benefits at 62 rather than 65 would be associated with a 20 percent reduction in their Social Security benefit.6

On that basis, our estimates are rather high. However, we have estimated 95 percent confidence intervals for both estimates using the delta method and both include this 20 percent figure.

Table 20.2 — Long-Term Impact of Labor Market Conditions on the Amount of Social Security Received by Retirees (standard errors in parentheses)

AllHigh School

High School

Attended/Completed

Dropouts Graduates CollageOutcome : Out of Labor Force

Unemployment rate age 58-59 0.187 0.114 0.338 -0.22-0.118 -0.216 -0.336 0.18




Outcome : social security receipt

Unemployment rate age 58-59 0.161 0.159 -0.127 -0.119-0.152 -0.197 -0.121 -0.124

Unemployment rate age 60-61 0.192 0.457 -0.142 0.172-0.163 -0.269 -0.162 -0.175

Unemployment rate age 62-64 0.962 1.064 0.937 0.065-0.193 0.286 -0.297 -0.204

Unemployment rate age 65-69 0.321 1.032 0.419 -0.718-0.137 -0.241 -0.199 -0.296

#obs.

Notes: Estimates come from linear regressions where the dependent variable is the natural log of Social Security benefits received. Other control variables include the contemporaneous annual unemployment rate, race/ethnicity, marital status, and age, state of residence, and year fixed effects. Reported coefficients are multiplied by 100. Standard errors are clustered by state.

4 Conclusions High unemployment has attracted much attention, but there has been less

consideration of how older workers have fared. In past recessions unemployment has remained relatively low for older workers, whose seniority often protected them during

6 These rules have since changed.


rounds of layoffs. However, age might not protect older workers as well as it once did, because workplaces are now less regularized and labor unions are less powerful. Also with the political situation and market collapse, which wiped out millions of dollars of retirement savings, appears to have raised fears about the affordability of retirement and discouraged many older workers from leaving the workforce. Older unemployed workers were more likely than their younger counterparts to be out of work for many months. This analysis began by hypothesizing that the current high rate of unemployment in the Republic of Kosova will lead some older individuals to withdraw from the labor force early (particularly after age 62), to claim Social Security benefits early, and to subsequently receive lower retirement income (as a result of earlier claiming of Social Security benefits). Our analysis of historical data provides evidence not supporting much of this conjecture. We find that individuals ages 62 and older are more likely not to withdraw from the labor force when the unemployment rate is high and are also more likely to be receiving Social Security benefits. These effects are strongest for less educated workers. Our analysis of retiree income is less persuasive, but still offers evidence that is suggestive in its support of our hypotheses.

Taken as a whole, we believe that these findings highlight the importance of focusing on the well-being of older workers who have lost their jobs in the present recession and may suffer lower income for many years as a result. On the other hand while marginal changes may be required to the current pension policy in Republic of Kosovo, the Kosovo authorities are advised not to make large changes to the current system. Indexing pensions to accommodate price increases since 2005 and the recent rise in food prices is clearly beneficial. But the structure of the current pension system is sound. For the future, the pension system provides both poverty relief for the elderly and a mechanism to provide a minimal level of replacement income without creating unsustainable fiscal liabilities for the Government. The current pensioners and soon to be pensioners are indeed receiving less than they had expected, but any attempt to provide better benefits for those with verifiable work histories will create more inequity for those with unverifiable work histories and will prevent the development of a sustainable pension system for current and future workers.

5 ReferencesAlexander, J. Trent, Michael Davern, and Betsey Stevenson (2010). “Inaccurate Age

and Sex Data in the Census PUMS files: Evidence and Implications.” NBER working paper 15703.

Autor, David H. and Mark G. Duggan (2003). “The Rise in the Disability Rolls and the Decline in Unemployment.” Quarterly Journal of Economics, 118(1): 157-205.

Coile, Courtney C. and Phillip B. Levine (2010). Reconsidering Retirement: How Losses and Layoffs affect Older Workers. Washington, DC: Brookings Institution Press.


Coile, Courtney C. and Phillip B. Levine (2009). “The Market Crash and Mass Layoffs: How the Current Economic Crisis May Affect Retirement.” National Bureau of Economic Research, Working Paper 15395.

Coile, Courtney C. and Phillip B. Levine (2007). “Labor Market Shocks and Retirement: Do Government Programs Matter?” Journal of Public Economics. 91(10): 1902-1919.

Steven Ruggles, Matthew Sobek, Trent Alexander, Catherine A. Fitch, Ronald Goeken, Patricia Kelly Hall, Miriam King, and Chad Ronnander (2009). Integrated Public Use Microdata Series: Version 4.0 [Machine-readable database]. Minneapolis, MN: Minnesota Population Center [producer and distributor].

Richard Hitz, Asta Ziniene, Sergity Biletsy and Tatyana Bogomolova,”the impact of the financial Crisis on the Public Pension System:Stress testing Models of Mandatory Pension System in Middle Income and Development Contries”, Social Protection Disscation Paper, World Bank, Sep.2009.

RISK

OBJECTIVE

MA

NA

GE

Alternatives for improving management of the value chain for greenhouse tomato

production in Albania

Denisa Pipera,* Ina Pagria,** Bahri Musabelliu***

Economy & Agribusiness Faculty, AUT, Tirana, Albania*Dr. Candidate

**Dr. ***Prof. Dr.

1 Problem statementThe production of fresh vegetables constitutes an important production activity

for farmers located in the western part of Albania. However, farmers’ access in the market is poor1. Furthermore, taking into consideration added value (created by movement in the value chain) farmers earn lower profit margins, while the opposite is true for other actors of the chain (wholesale sellers and retail sellers, etc). As a result, this situation affects negatively the prices paid by customers.

In Albania, one can notice a significant geographic concentration of fresh

1 In the Lushnja, Fier and Berat region several meetings have been held with representatives of the extension services, farmers as well as representatives’ greenhouse tomato production. These meetings confirm that the connection among the farmers engaged in the production of fresh vegetables and the market (marketing infrastructure) are not consistent.


tomatoes on one side of the country and the marketing infrastructure on the other. Yet, there is a lack of cooperation and integration in these markets as well as the value added chain. This is mainly due to a fragmented demand and lack of cooperation horizontally and vertically.

The range of issues and the strategies that enable an increase of participation and control of the tomatoes producers in the value chain are, thus far, poorly understood. In the face of this situation, this project is tied to the indispensability of having a study in place which analyzes and puts forward in a thorough way the problems concerning these issues and strategies.

Studies in the field of value chain analysis for different products and for identification of alternatives of improving management in the value chain (horizontal cooperation, vertical integration, clusters etc), are relatively new. This study requires studying in depth details of all problems related within the value chain with the aim of identifying alternatives that allow the participation of greenhouse tomato producers in this chain.

2 Objectivesa. The main objective of the study would be to understand and evaluate

the current situation of the agro-processing industry in such a context as to analyze and prove the hypotheses that are concerned with the range of issues facing the strategic leadership, seeing it from the perspective of the strategy of vertical integration and horizontal cooperation as well.

b. Furthermore, it intends to bring out and evaluate the role of all the actors that figure in the chain of values. Based on this chain of values, conclusions might be formulated around the strategies that might be utilized to stimulate internal cooperation and build partnerships through the organization and functioning of clusters.

3 ProceduresRealization of this study enables analyzing and evaluating the tomato value chain

in the context of the research questions displayed in Figure 21.1.

The focus of the research lies on discovering variables for: 1) fostering local strategies for increasing the role of greenhouse tomato producers and 2) stimulating cooperation among different actors in the value chain. We used the econometric method of multiple regression analysis based on data relating to margins, profits, floating capital, investments made in the greenhouse, number of employees, geographic region, type of product, age of business etc.

Denisa Pipera,* Ina Pagria,** Bahri Musabelliu*** 237

Processing/Storage

Consumption

Production

Local System

MarketingResearch question

1. Ho is the relationship coordinated between actors?

2. What are the outputs?

Research question

1. In what way is possible the introduction of single producers into the value chain?

2. What influence have they in the decision making process?

Val

ue

chai

n

Research question

1. How are fresh vegetable value chains structured?

2. Which actors define requirements?

3. How do requirements get transmitted to various chain actors?

Ins t i tut iona l E nv i ron me nt /Marke t s

Figure 21.1 — Conceptual Framework and Research Questions.

Multiple regression analysis is more amenable to ceteris paribus analysis because it allows us to explicitly control for many other factors which simultaneously affect the dependent variable. This is important both for testing economic theories and for evaluating policy effects when we must rely on non-experimental data. Because multiple regression models can accommodate many explanatory variables that may be correlated, we can hope to infer causality in cases where simple regression analysis would be misleading. Naturally, if we add more factors to our model that are useful for explaining y, then more of the variation in y can be explained. Thus, multiple regression analysis can be used to build better models for predicting the dependent variable. The general form of multiple regression function is:

µβββ ++++= .....22110 xxy

(Jeffrey M. Wooldridge, 2003), where as dependent variable we chose profit and floating


capital and as independent variables we chose investments, number of employees, geographic region, type of product, age of business. An additional advantage of multiple regression analysis is that it can incorporate fairly general function form relationships.

4 HypothesesReferring the above research questions, the study is focused on analyses, evaluation

and confirmation of the following hypotheses:a. Vegetable producers in the greenhouses, as representatives of a modern

industry (normally profitable), as actors of value chain, are faced with lack of partnership and therefore with lower profit margins of value chain.

b. Encouraging and development of horizontal cooperation between farmers in the greenhouses, through marketing cooperatives, will enable participation and increasing their role in the value chain and therefore providing higher benefits.

5 Data collectionFor the realization of the objectives of this study, two questionnaires were

developed, to be administered to the leaders of green house tomatoes procedures. In compliance with the study objective, a qualitative methodology of collecting and processing information was used.

This research was focused on identifying and analyzing different variables, aiming at building strategies for improving management in the value chain in the vegetable filière, as well as getting acquainted with and facing competition, etc. It is known that competition does not depend only on the productivity of a single firm, but also on the integration of local firms that produce fresh vegetables and in coordination with relations among actors of the value chain. Figure 1, Conceptual Framework and Research Questions illustrates the conceptual framework on which the questionnaire was conceived, based on the theoretical background presented in the first part of this study.

6 Findings, analysis and interpretationFirst, it is worthwhile to emphasize that in most cases farmers who cultivate

tomatoes in the greenhouse were interviewed. The educational level of farmers and/or leaders of the family farm was relatively good; these people were working there


full time and the dominant age of interviewees was around 40-60 years. Albania had a very good tradition of vegetable production before the 90s, (especially tomatoes) and it should be pointed out that the destruction of the vegetable production industry that happened at that time brought about a significant decline in production. Survey results indicate that of around 64 hectares planted with vegetables (study samples), tomatoes constitute about 73% of the area and pepper constitutes about 5% of the area, which together forms 78% of the total area. Survey results confirm the above mentioned assertion, as we can see from the data illustrated in Figure 1.

44%

1%

8%4%8%

6%

2%3%

6%2% 13%

2% 0% 1%Surface (Ha) Tomatoes (greenhouse)

Tomatoes (field)PotatoesMelonPepperCabbageString BeanSpinachSaladEggplantCucumberCauliflowerLegumeCarrot

Figure 21.2 — Vegetable Production Structure.We believe that further diversification of vegetable production structure is

necessary, especially concerning some kinds of garden plants for which there is market demand and their added value is increasing. Based on this idea and within the study framework it was interesting to know better the future trends for vegetable production structure. Hence, we asked in the questionnaire if tomatoes producers thought that this structure would change for 2010. Results show that approximately 56% of the interviewees answered positively. This situation shows that tomatoes producers, especially those in greenhouses, have tried to include in the production structure a number of other garden plants, which are lesser or never cultivated.

It is very clear that for building production structures it is very important to know where to go for advice and who should advise farmers. Therefore, we asked who had advised them about the information they were given for the construction of vegetable structures.2 The survey results are presented in Table 21.1.

2 Bringing the attention of the reader that the study in question had had in focus the problematic of improving management of value chain for tomato in the greenhouse, but the fact that greenhouse farmers produce not only tomato but also other vegetables, it is way in this study is used often the term “vegetables”.


Table 21.1 — Construction of Production Facilities.3

No. Description Data in % 1 Yourself without any information 542 Your perception of the market 283 Your perception that in this way you can earn more

money40

4 Advisory services in the area 565 Representatives of processing enterprises 06 Physical persons 127 Economic needs 2

Referring to Table 21.1, we can conclude that vegetable producers use different sources of information for the construction of production structures. In general, the local advisory service constitutes the most important source of information; in about 54% of cases, the interviewees did it themselves, and in 56% of cases, they were assisted by the local advisory service. It is worth emphasizing the fact that producers have little knowledge about the market; only 28% of respondents stated that they based the construction of production facilities (structures) on market information.

The data in Table 21.1 show that none of the respondents has been in contact with representatives of the processing enterprises industry, which made us understand that it is very difficult to talk about vertical integration with back direction. This phenomenon is very problematic for providing safe markets for vegetable producers.

Undoubtedly, production constitutes the main link in the vegetable supply chain. However, we cannot speak of the term “chain” if we do not consider other links through which the product goes until it reaches the final consumer. That is the reason why respondents were asked if they had received consultation on tomatoes treatment, and if “yes”, by whom.

Table 21.2 — Information Regarding Consultancy about Vegetable Treatment.

No. Description Data in% Yourself without any information 541 Myself 302 Experts 383 Family Members 154 Executives 05 Advisory services in the area 476 Different enterprises 67 Input trades 12

The data in Table 21.2 indicates that generally, about 47% of respondents have

3 Interviewers ticked more than one question, therefore, the result is more than 100%.


consulted local advisory services, while 38% asked different experts.

As for the conditions in Albania, the distribution of production, and particularly of vegetables under this context, is associated with many problems. Getting acquainted with this situation in advance is one of the main reasons why this study was undertaken. The interviewees were asked if they had ever had contacts with a third party concerning vegetable sales and quantities sold through these channels. The survey results are listed in Table 21.3.

Table 21.3 — Information about Contacts with a Third Party.No. Description Data in % Sales1 Traders 24 87002 Preservation enterprises 2 6003 Different people 16 36044 Sales by them-selves 8 2200

As can be seen from Table 21.3, some of the interviewees did not answer this question. As for those that answered, in most cases, about 24% of respondents have had contact with different traders and in about 16% of cases, tomatoes producers have had contact with different people, in an informal way4, and it should be noted that in this case the contract system has not worked.

The methods used for tomatoes sales undoubtedly constitute a very important element for the issue of improving management in the supply chain. According to this issue, the interviewees were asked a number of questions, as illustrated in Table 21.4.

As can be seen from the data in Table 21.4, about 82% of interviewees answered that they had sold products by themselves in the market and this is related with wholesale markets that actually exist in several districts of the country.

However, we should keep in mind that we are speaking mainly of tomatoes producers in greenhouses, and not of tomatoes producers in open fields. However, even in this case, due to lack of cooperation among producers, fragmentary supply, lack of producer partnership in the markets, etc, producers are facing many problems regarding the profitability level. On the other hand, contacts with the processing and conservation industry are very weak and only in 14% of cases have the agro-industry companies been interested in buying directly from tomatoes producers.

Table 21.4 — Information Related to Alternatives of Vegetable Production SalesNo. Description Data in % Sales1 You have sold by yourself to the processing/canning

companies. If yes, how many:10 1730

4 Generally meetings and informal conversations.


2 Processing/canning companies have bought directly from you. If Yes, how many:

14 9070

3 You have sold by yourself to the storage centers.If Yes, how many:

22 3760

4 Storage centers have been buying from you. If Yes, how many:

16 5020

5 You have been selling directly in the market place. If Yes, how many:

82 16139

6 Production sold in the field 4 200

Considering the answers given by respondents regarding the ways of selling their products in the markets, we can make a general reflection as illustrated in Figure 21.3.

Figure 21.3 shows the steps through which the tomatoes production industry enters the market channel. Here are included picking, packing, transporting, broker services, wholesaling, shipping, as well as retail sales. The retailer always charges higher prices for products compared to what he/she pays the producer. The producers’ profit is much smaller compared to that of the retailers’ because of fluctuation periods. Selling direct to the shops adds value to the producer. Furthermore, direct marketing reduces the need for packaging, hence there are fewer costs and producers profit more. Roadside markets eliminate the need for transportation because they sell products on the farm where they are produced.

On the other hand, pick-your-own is a good strategy for customers, which means picking products by themselves and bringing them to their home. This is a way of reducing costs. Furthermore, agricultural entertainment is becoming one of the most profitable ways to add value to producers.

As can be seen in Figure 21.3, the options used for product sales on the market are different. It shows that a small number of farmers sell their products on the street. Of course, here we refer to farmers who produce limited quantities; this kind of sale is not an alternative to be recommended, because it is applied mainly by farmers for self-subsistence.

Most tomatoes producers use more than one alternative for selling premiums. Hence, for example, a large number of farmers that were interviewed sell their own products in the local markets to wholesalers and in special cases to exporting companies. However, which are the positive and negative characteristics of these methods of sale?. Let us refer to the data in Figure 21.4 gives four levels of price escalation for tomato production in Albanian currency (All).


Farm O

perations

CONSUMERRESTAURANTS INSTITUTIONS

Operation and other actors in the

supply chain zinxhir

Operation and other actors in the chain

VEGETABLES PRODUCER

MARKET SALES

5% of farmers interviewed

Road m

arket

Direct to

accumulative

Local m

arket

Wholesale

Markets

35% of farmers interviewed

10 % of farmers interviewed

50 % of farmers interviewed

SUPPLY C

HA

INS

Accumulation

Cleaning

Transport

SaleSale

DepositDeposit

Standardiza-tion packingPacking

TransportTransport

WholesalerWholesaler

RetailerRetailer

Figure 21.3 — Value Added Supply Chain in the Study Area

As can be seen more clearly from Figure 21.4, the tomatoes producer earns from his activity on the farm about 0.13 Eur/kg or 15 All/kg (55-40), while the other actors in the supply chain earn about 0.30 Eur/kg or 40 All/kg (95-55), only for operations like transport, storage, etc., which are performed for a short period of time. Thus, it can be concluded that the length of this chain and the great number of actors involved in it constitute a major problem for tomatoes producers.


Considering the above comments that derive from the scheme presented, and evaluating also the general business environment in Albania, we believe that in general, the tomatoes supply chain should function as follows. On this issue, the interviewees were asked about their agreements. The results are shown in Table 21.5.

020406080

100

4055

70 95

Production cost Producer price to the wholesaler

Price sale to the retailer Price sale to the consumer

Figure 21.4 — Price Escalation of Tomato Production.

Table 21.5 — Information Regarding the Types of Agreements and Destination of Sales.

No. Agreements and their types InformationI Types of agreements Data in % Sales1 No. agreement 84 02 Oral agreement 6 18003 Agreement with traders 8 21004 For export 2 600II Destination of sales Quantity (Quintal) %1 Wholesale in the local market 282 Industries 193 Domestic market 254 Export 35 For fresh consumption 42

Referring to Table 21.5, we can see that over 84% of the interviewees have not signed any legal agreement, only 6% of the respondents have an oral agreement, and about 8% have an agreement with different traders. On the other hand, the majority of products are sold for fresh consumption and the remainder, and 50% are traded on the local markets.

Referring to the above discussion, we can thus make a summary of the problems that are associated with the production system and vegetable trading, identifying and assessing them as strengths, weaknesses, opportunities and threats.

In favor of the realization of this study, and referred general form of multiple regression function is:


µβββ ++++= .....22110 xxy ,

we gathered data for: investment volume, surface planted with tomato, efficiency, realized production, sale price from farmer, production sold, sale’s price from wholesaler, sale’s price from retailer, total revenue, sale’s revenues and number of participants in the chain, where as:

■ Dependent variable is chose the revenue. ■ Independent variables are chose the other indicators.

Study results showed that there is a strong link between levels of added value in the production of fresh tomatoes in green houses and investment level, number of actors into the value chain & farm size.

Considering this conclusions we think that a strategy of horizontal and vertical integration, regarding the benefit of clusters in the greenhouse vegetable sector, would be a useful solution and we support and strongly recommend this idea.

6.1 What kind of cooperation and cooperative type does Albania need?

Referring to the problem of the cooperation efforts of Albanian agriculture it should be highlighted that the most convenient form of organization is according to unique management and separate ownership. Separate ownership of land implies the owner’s right to own it, but its use could be individual or collective. According to this principle, cooperatives could be managed in two ways. According to the first way, land is not fated for common use, and farmer-members of cooperatives practice their activities in their farms and in total autonomy. In this organization form, the management is focused on cooperatives, which show up in two main aspects. Firstly, the cooperative orients farmers to define production structures in their farms. Secondly, it accumulates the produced products by farmers to sell them at better prices.

According to the second method, land is fated to common use, saving ownership and its borders. It is obvious that this organization form represents a high level of cooperation, and farmer-members of cooperatives practice their activities not very simply and only on their own lands. In the case of the dissolution of a cooperative, land passes into the individual use of its owners. A farmer’s position in a cooperative like this is shown in Figure 21.5.

Cooperative cooperation according to the principle of unique management and separate ownership has many advantages, a few of which are mentioned below.

■ Very Acceptable from the Psychological Point of View: Preservation of activity autonomy in farm, farmers understand very well that it is not a cooperative with unique management and separate ownership, farmers are convinced that the cooperative is the only enterprise here on that farmers can do business with in their favor, big possibilities to


consider social problems of farmer families, etc. ■ Simple to be Realized from the Organization Point of View: In this

cooperation form, cooperatives should be considered as a “storehouse” or “shop” where farmers sell their products and buy inputs that they need to reduce or organize expenditures, especially when the cooperative is considered multi-purpose, etc.

■ Effective in Considering Economic Factors: Increase of supply and negotiation possibilities; Increase of farmer’ partnership in markets; Increase of enterprise size and profits from “economy scale” effects; Bigger possibilities for farms’ vertical integration; Supplement profits for farmers as a consequence of the control increase in the value added chain; More flexibility to determine price policies; Procurement of missing services in different rural areas; Marketing improvement; Profits from risk reduction; Increase of market power; Quality improvement; Provision of furnishing and markets; Bigger profits from coordination activities of consequence; Increase of political influence; Better education possibilities; Support for family farms; Other benefits for the wider community

■ Effective in Considering Management Factors of Cooperative Activities, etc. Farmer members of cooperatives only need management orders on how to practice their activity.

Farmer

Farmer

Farmer

Greenhouse vegetable farmers‘ cooperative(Supplying and marketing) Market

Farmer

Farmer

...

Vote control, fortune, movement of funds, patronage, etcMovement of production, purchasing, sale, etc.

Figure 21.5 — Organization of Marketing and Supply Cooperative According to Unique Management and Separate Ownership.

6.2 Cooperatives and activities in the value chain

As mentioned in the theoretical part, value chain analysis describes all activities that occur in the organization where these activities are related to an analysis of the


competitive strengths of the organization. This idea came upon the insight that an organization is more than machinery, equipment, people, as well as money. Porter (1985) argues that the ability to perform particular activities and to manage the linkages between these activities is a source of competitive advantage. The idea of activities in the chain that adds value is to increase potential customer utility. Furthermore, organizations should always deliver products for which customers are willing to pay a higher premium than the sum of the costs of these activities in the chain. On the other hand, we have also said that value added expresses the difference between the value of goods sold and the cost of materials or supplies used in producing them. It also means adding value to a raw product by taking it to the other stages of production.

Referring to Figure 21.5, the organization of tomatoes producers in the supply and marketing cooperatives is to the benefit of the growth of added value. Furthermore, this is to the benefit and function of the added value control from tomatoes producers.

As stated in figure, which reflects the added value chains for tomatoes, the number of actors that participate in the chain goes from 4 to 6. Furthermore, vegetable producers do not have any influence in this process. If we consider another interesting fact, the exact levels of value added are along the value chain excluding production, we can conclude that membership of the tomatoes producers in the cooperative would be an extremely lucrative alternative (specifically when it comes to producers of tomatoes), as it would be to the benefit of downsizing the value chain. Among the benefits of this type of integration, we also would like to emphasize the increase in the level of partnership of tomatoes producers in the market, through the increase in the level of control with many links in the value chain, and the increase in the level of economic benefits for tomatoes producers.

The above claims are based on the concept of a specific role that a cooperative plays as the connecting point between the producers and retailers, as shown in Figure 21.6.

However, are tomato producers ready to cooperate among themselves? To answer this question, during the study were collected data for a number of indicators, such as: Age of farmers, Gender, Farms Size, Education, Profession, Level of sociability, Desire for cooperation or Willingness to cooperate, Information for markets, Transportation problems, Distance form the consumption center, Evaluation for prices.

By processing the data resulted a stronger relationship between the level of potential cooperative and farm size & age of farmers. According to the results, the study show that young people are more willing to cooperate among themselves, mainly in terms of buying inputs and selling products.


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Figure 21.6 — The purchase-sale relationship for fresh vegetables: the role of the cooperative

The organization of the purchase and sale relations between producers, cooperatives and retailers can be seen clearly in Figure 21.6, concerning the role played by the cooperative in relations between actors, the impact that it has in the concentration of the offer, the cooperation between actors, etc. To understand the development of the relations illustrated in Figure 21.6 we must first understand what has happened at the retail level.

■ The level of retail is generally characterized by a very high concentration


(Humphrey and Memedovic, 2006), which gives retailers the opportunity to have a very strong position in the market; on the other hand, it allows governing/ managing the chain according to their desires and demands.

■ Retailers need large quantities of production, purchased from major suppliers, focused on time, price and conditions wanted by retailers. They have very specific and rigorous requirements of quality and safety for products, requirements that a cooperative can ensure and meet very well. This obliges them to have close relationships with main suppliers for accomplishing their needs, in our case, for the cooperative.

■ Retailers need to exchange information directly and to have direct agreements about products, prices, qualities, quantities, etc; a cooperative enables such a thing.

■ Everything that retailers need is a signal for producers, who, through membership in cooperatives, increase their business to create increased supply capacity. This can be used very well as a strategy to gain power in relations with buyers.

■ In the supply chain analysis, two very important elements are concentration and power. A high concentration of retailers leads to the creation of oligopolies and inequalities in the market power. Concentration is very important, because the level of concentration of retail leads to the increased concentration in other parts of the chain (Humphrey and Memedovic, 2006; Hingley, 2005).

■ A very important aspect of the value chain theory is the issue of the leadership chain and dependence (Humphrey and Memedovic, 2006). In this context, the presence of cooperatives puts the producers in the position that belongs to them.

The role of cooperatives in improving management in the supply chain is also suggested for other reasons. As mentioned above, retailers must have stable relationships with the main suppliers because suppliers may guarantee for them the safety and quality of the products that they want, as traders often cannot guarantee high-quality safe products because they buy from different manufacturers that can be changed.

Therefore, we do not believe that wholesale is a valuable strategy for selling fresh tomatoes to major supermarkets in the modern markets. Moreover, retailers can’t afford the expenses to go to wholesale markets and buy small quantities of products from different suppliers.

It is not difficult to notice that in this case is aimed further growth of market power, but not only that, also due to the entry in the “game” of other producers who do not have membership in the cooperative. They are offered two alternatives for the distribution of their product. In the first case, they can enter a special commercial agreement with wholesalers, and in the second case, they can use the cooperative to sell their products.


7 Conclusions1. The ways they accomplish the sale of vegetables undoubtedly constitutes

an important element (possibly the most important) for the problems related to the improvement of the supply chain. It emerges from the study that about 82% of the interviewees answered that farmers have sold their crops themselves in the market, and this is related to the wholesale markets that exist in several districts of the country.

2. We judge that the organization of vegetable producers in cooperatives with supply and marketing functions (as we have presented in this study) is for the benefit of increasing the value added, and furthermore, to the benefit of its control function (added value) on the part of the vegetable producers.

3. The membership of the vegetable producer in cooperatives would be an extremely profitable alternative (especially when it comes to vegetable producers), as it would be to the benefit of downsizing the value chain, furthermore, increasing the level of partnership of the vegetable producers in the market through cooperatives, increasing the control level of many links in the value chain, and increasing the level of economic benefits for vegetable producers.

4. The above claims are based on the concept of a specific role that cooperatives play, as the connecting point between producers and retailers; this is because retailers need large quantities of a product, purchased from major suppliers, focused on the time, price and conditions wanted by retailers. Furthermore, they have very specific and rigorous requirements for the quality and safety of products, requirements that a cooperative can meet very well.

5. In the supply chain analysis, two elements that are most important are concentration and power. A high concentration of retailers leads to the creation of oligopolies and inequalities in the market power. Concentration is very important because the concentration in the level of retail sales leads to increasing concentration in other parts of the chain.

6. A very important aspect of the value chain theory is the issue of the leadership chain and dependence, where the presence of cooperatives put the producers in the position that they belong.

7. In the study it is concluded that retailers should have solid relationships with suppliers, as this may guarantee them high-quality safe products that retailers want, as traders often may not guarantee the quality and safety of products because they buy from different manufacturers.


8 References Clements, Michael. D. J., and Price, Nigel. J. 2007. A Transfer Pricing Apparatuses for

Measuring Value Added along the Supply Chain: Reflections for Internet based Inter-Organizational Relationships. Australia. Journal of Internet Business. Issue 4.

Humphrey, J. and Memedovic, O. 2006. Global Value Chains in the Agrifood Sector. United Nations Industrial Development Organization (UNIDO).

Lawson, R., Guthrie, J., Cameron, A., & Fischer, W. 2008. Creating value through cooperation? An investigation of farmers’ markets in New Zealand. British Food Journal. 110(1). pp. 11-25.

Porter, Michael. 1985. Competitive Advantage, USA. Simon & Schuster.

Poirier, Charles. Advanced Supply Chain Management. USA. Berret-Koehler Publishers.

Ponte, S. 2008. Governing through quality: conventions and supply relations in the value chain for South African Wine. Sociologia Ruralis. Vol. 49, No. 3, pp. 236-257.

Sturgeon, T. 2008. From Commodity Chains to Value Chains. Interdisciplinary theory building in an age of globalization. Bair. Jennifer (ed.), Frontiers of Commodity Chain Research.

Van Dijk, G. and Klep, Leo. 2005. When markets fail. Original version in Dutch part of a series. “Bedrijfskundige signalementen”. Academic service.

Wooldridge, Jeffrey M., 2003 Introductory Econometrics: A Modern Approach, second edition. Cincinnati, OH: South-Western, College Publishing.

Ministry of Agriculture, Food and Consumer Protection in Albania. Statistical Yearbook. (2010).

Konferenca e Katërt Ndërkombëtare për Riskun

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