IMF study warns Albania about critical level of reliance on volatile Foreign Direct Investment

International Monetary Fund has recently published a study titled Volatility Capital Flows in Emerging Economies, where one of the countries surveyed in this analysis is Albania.

Among neighboring countries, the International Monetary Fund study analyzes Macedonia and Serbia, while other countries in the region analyzed are Romania or Bulgaria.

The graph shows the share of FDI in gross domestic product of a country. Albania is convincingly above its neighbors, but also convincingly above other countries, such as Russia or Mexico.

Albanian Foreign Direct Investments are at the level of 1.5% of GDP, while in Macedonia FDI is equal to about 0.1 to 0.2% of GDP.

In Serbia, the rate rises to 0.5% of GDP. Overall average of emerging markets which are analyzed is at the level of 0.79% of GDP.

The fact that Albania is above its neighbors and in a very favorable position in terms of foreign direct investments, does not necessarily mean that this is something positive.

The International Monetary Fund study emphasizes the high volatility of foreign direct investment, especially in developing countries.

Foreign direct investments have been the engine of economic growth in Albania over the years, and are often crucial for the country’s economic growth rate.

The concrete case is the current year and the next year, where foreign investments, thanks to TAP pipeline, constitute the main thrust of economic growth at over 3%.

But since they are volatile, foreign direct investment cannot serve as a source of sustainable economic growth.

In its latest assessment of Albania’s sovereign debt, the rating agency Standard&Poor`s emphasized that foreign direct investment, currently at its peak, mainly thanks to TAP, are expected to fall over the coming years.

Meanwhile, the International Monetary Fund, in its latest study, underscores that volatility in flows of capital is quite detrimental to macroeconomic and financial stability, adding that this is one of the key challenges for policymakers.

SCAN

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