Event

Following a three-month boycott and threat of boycotting the forthcoming parliamentary elections, the opposition Democratic Party and the ruling Socialist Party have reached an agreement. As a result, Parliament, dissolved in early May as required by the constitution ahead of an election, held a special session to vote for the bill that established the agency to scrutinise judges and remove corrupt magistrates from power. The creation of such an agency is the first step towards an independent judiciary, a key requirement for the EU membership process. Parliament also approved a Cabinet reshuffle. Indeed, Prime Minister Edi Rama of the Socialist Party agreed to give seven ministerial posts to the main opposition party, the Democratic Party, including the Interior, Justice, Education and Finance ministries. The opposition will also have a chair on the Electoral Commission. The general election will be postponed by a week, to 25 June.    

Impact on country risk

The agreement is a crucial step for preparing the forthcoming parliamentary elections. Following the election, it remains to be seen whether the new government will continue to pursue prudent macroeconomic policies put in place by the current government. Indeed, over the past few years and under the auspices of an IMF programme that ended in February 2017, the authorities have implemented various structural reforms aimed at strengthening economic growth – which is expected to reach 3.7% this year according to the IMF World Economic Outlook (April 2017) – and correct large macroeconomic imbalances. Public debt increased rapidly between 2011 and 2015 and peaked at 73.7% of GDP in 2015, a high level. However, since 2016 it has been on a downward trend due to the efforts of the authorities to control public finances – the primary balance was even in surplus in 2016, the first surplus since 2010. The reforms of the unsustainable pension system and unviable electricity sector have advanced considerably according to the IMF, putting less strain on public finances. The current-account deficit continues to widen from 10.8% of GDP in 2015 to 13.7% expected in 2017. However, it is partly due to due to import-intensive foreign direct investment in the energy sector. The gross external debt has been on a downward path since 2016 but remains high (at around 70% of GDP in 2016). Short-term debt is also on the decline but remains high, which is a key factor that weighs on the short-term political risk (currently in category 3), which represents the liquidity of a country. On the positive side, the foreign exchange reserves covered more than five months of imports, a sufficient level, and are relatively stable.

Analyst: Pascaline della Faille, p.dellafaille@credendo.com