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Albania: What you need to know about investing in the country according to Total Impact

Source: Total Impact Capital EU, written By Anouk Banlier & Frida Rica.

2023 was a big year for Albania – the country affirmed itself among Europe’s top destinations. Many visitors– who used to skip Albania in the past whenever visiting the Balkans – have now discovered the country and fallen in love with its beautiful beaches, magnificent alps, affordable prices, and delicious cuisine.  Recently, many media outlets across the world have been calling the country “Little Italy”, “Maldives of Europe”, or “the Caribbean of Europe” and similar names in their articles pointing out to the surprising multitude of experiences that Albania has to offer, all within reasonable cost and easy reach (especially for Europeans).

 

Next to the surging interest in Albania as a tourist destination, more and more people and organizations are looking at the country as an investment destination in the light of recent developments and the EU integration prospect. This article touches upon the opportunities that Albania offers to (impact) investors and internationals who are looking to do business in the country and lists some of the challenges to be aware of.
 
Ksamil Beach, Sarande

 

Discovering Albania: Beyond Tourism

Tourism is without doubt one of the sectors experiencing exceptional growth in Albania, particularly in the last few years. Campaigns from the government; endorsements by international stars like Dua Lipa, exposure through Tik-Tok and Instagram influencers; have all contributed to Albania’s reputation as an unexplored, beautiful, budget-friendly destination. According to official statistics,  in 2023, more than 10 million international visitors entered Albania with over 9.5 million indicating holidays and family visits as the main reason for their visit, a 35 % increase from the previous year.[1]  
 
Even without looking at the official numbers, any local could easily tell you that in the past year they have indeed witnessed an influx of foreign visitors from the crowded beaches of the south to the most hard-to-reach beautiful hiking trails in the north.
While travelling to Albania has become more pleasurable and easier than in the past decades, investing or doing business in the country as a non-Albanian is a different ball game.
 
To begin with, the Albanian way of doing business requires forging a strong personal relationship first, before one can do business. As such, mutual trust is fundamental to any business partnership. It takes “a village” to establish and grow any enterprise in Albania: small local businesses are established primarily with money from friends and family, especially with remittances which have played and continue to play a very important role in the country’s economy since the early 90s. Internationals need their village too, especially the ones who are not so familiar with the country and its dynamics – in other words, in Albania, knowing-who, in addition to knowing-how, is the secret ingredient of success. This way it is also easier to navigate any informalities existing within specific sectors or in the markets in general.
 
Another important aspect is that accession negotiations between the EU and Albania, which began in July 2022, have fostered a clear path and sense of urgency for Albania to continue legal, economic, and social reforms in line with the EU expectations, with a priority on strengthening the rule of law and the judiciary system, as well as fostering digitalization.
 

Investing in Albania: what you might want to know

 

Attractive sectors

Hospitality is deeply embedded in the country’s DNA and it is one of the most attractive sectors to invest in the country. As the inflow of tourists to the country is expected to grow, substantial investments by both the private and public sector are needed to improve the infrastructure, build expertise, and increase sustainable practices so that Albania can preserve its authenticity while enhancing its services. In terms of finding a niche as an investor, across the tourism sector, investments in agrotourism are particularly attractive as they bring together impact and financial profitability, building on the comparative advantage of the climate and nature that Albania has to offer. The government supports certified agritourism operators through fiscal incentives such as VAT at 6%, income tax at 5% and infrastructure tax at 0%.[2] From a social perspective, agrotourism has the potential to become an engine of development for rural areas and farms by increasing employment, empowering women who often work in this sector and fostering youth employment.
 
Other sectors that we see as healthy investment prospects are Renewable Energy, ICT & Business Process Outsourcing (BPO), as well as Agriculture and Food Processing. These sectors are seeing a real surge in demand for products and services driven by global trends such as supply chain disruptions and climate change. For instance, interest in the renewable sector, especially in photovoltaics is greater than ever also driven by EU’s prioritization of the sector. Other sectors such as BPO are growing because businesses from the EU can make use of the lower production costs and skilled workers. Even more traditional sectors such as agriculture and food processing provide good opportunities for impact and profit especially for specific products such as olives, citrus, and medicinal herbs.
 

Investment considerations – market advantages and pitfalls

From a legal standpoint, foreign investors in the country are protected by the law on foreign investments, which is based on principles of equal treatment, non-discrimination and protection of foreign investors.[3] From a fiscal perspective, a new tax regime, since January 2024, has set the corporate tax of at 15% (with certain exceptions for strategic sectors). Other advantages of the country include the competitive real estate prices and relatively cheap labor costs. For example, according to the Institute of Statistics of Albania the monthly gross average salary in Albania as of Q3 2023 is 71,486 ALL (approx. 688 EUR). As for the real estate sector, in the capital, Tirana, you can buy commercial spaces and offices from EUR 1,500-2,000 per m2 or rent from 10-15 EUR/m2 monthly in some of the preferred areas of the city.
EU integration ambitions continue to be an important drive for necessary reforms. These reforms are important both for locals and foreigners looking to do business in the country. For instance, digitalization provides ease of access, less exposure to potential red tape and corruption as well as more clarity on processes. The ongoing justice reform is another important layer of security that foreign investors need to confidently enter the country, although – while these reforms materialize and solidify -guidance in navigating the country’s public administration is necessary to ensure that potential issues are tackled early on.  The good news is that Albania and other candidate countries are more motivated than ever to walk the talk and implement reforms with a view towards the EU’s next enlargement round in 2030. 

 

Having a trusted partner in the country is crucial to help investors navigate market pitfalls.. For instance, barriers to entry are more pronounced in sectors with higher government intervention such as the renewables sector where there is still a lot going on in terms of establishing regulations and creating a market. Also, investments considered strategic by the government are more strictly regulated. This can create an inner circle close to power based on common financial interests. It is not uncommon for people  with the best connections using financial and political power to get ahead with their projects. The construction/real estate sector for instance is one of the most competitive ones – often alleged to be one of the sectors exposed  to money laundering activities in the country. Other issues that are faced in the real estate sector are irregular titles of property – it is therefore critical to make all the necessary checks and gathering background information before engaging in any transaction. This strongly relates to all other sectors of interest such as tourism, agriculture, food processing, etc. where immovable assets such as plants, land, and buildings are part of the investment.
 

Opportunities for impact

Challenges encountered in doing business in Albania are not a secret – they are acknowledged (for the most part) and targeted by the government and EU- accession directed reforms. For people looking to invest or conduct business in the country, it is important to have an understanding of wider society and economic challenges where also the biggest opportunities for impact lie.

 

MSME financing

Besides the anti-corruption and justice system reform, fostering entrepreneurship and entrepreneurial skills is one of the most important steps that can be taken to support Albania’s economic and social development . The private sector – especially MSMEs – is crucial for Albania’s economic development: in 2021, Albania counted more than 100,000 micro, small and medium-sized enterprises (MSMEs), representing 99.8% of all enterprises in the economy. Their contribution to employment in the business sector added up to 81.9% of all jobs.[4] The main financiers for these MSMEs are banks and microfinance institutions. Commercial banks have been providing new loans in Albanian Lek at an average of 7 to 7.5% in Q1 2023 (a jump from 5.8% in 2022).[5] Loans in Euros average at 5.4% for the same quarter. The microfinancing sector offers loans in Euros and Lek with interest rates ranging from 14 to 21%.

 

The banking system in Albania is rather liquid – however, according to the Bank of Albania, banks are recently employing more prudent and risk-averse policies when it comes to lending to businesses in anticipation of possible economic downturns. This disfavors local businesses that require flexible financing solutions, especially in times of economic uncertainty. Loans remain typically the preferred financing instrument – the Private Equity and Venture Capital ecosystem is still in its infancy in the Western Balkans in general, and the availability of equity financing is significantly lower compared to other Eastern European countries due to the difficulty of attracting third party investors to the region.[6]

 

Fostering women and youth entrepreneurship

Albania is still a very patriarchal society and there are gender-specific barriers to women as professionals and entrepreneurs. This is a deep-seated issue that cannot be solved exclusively by training the HR officers of the companies or the loans officers at the bank branches – the problems are more structural, and they start early on in families. However, there are also huge opportunities to invest in women who are increasingly becoming emancipated, tech-savvy, highly educated and entrepreneurial. Innovative financing mechanism can help these women overcome financing barriers such as the lack of collateral – property is often inherited through the male descendants of the family. To date, international donors and investors have mostly worked through local financial intermediaries providing guarantees and other mechanism to enable them to better serve this group (e.g Women in Business programme by EBRD). Capacity building is an important component that needs to be carefully tailored to address the needs of local women in business – this should be made available at all stages of the business and include the incorporation of sustainable business practices.

 

Fostering youth entrepreneurship

Young entrepreneurs (under 35) are another group who could greatly benefit from improving available financing and capacity building. Like women entrepreneurs, young entrepreneurs are often impeded by a lack of collateral, network, and know-how. In order to reach out to these groups and make an impact it is very important not to only to look at “sexy” business ideas and startups, also into traditional businesses especially to those outside of major cities. Fostering youth entrepreneurship is also one of the ways to prevent brain drain as many young people leave the country in search of better economic opportunities and a higher standard of life. Under the current trends it is very important for public and private sectors to offer more incentives for young people to stay in the country in the first place with clear professional development perspectives. A potential result of investing in the country would be the return of skilled workers who often bring foreign expertise and a fresh perspective – there are various successful examples especially in the hospitality industry.

 

Financing renewable energy projects

Albania is one of the countries that it is already relying on renewables for its energy production – hydropower accounts for 95% of all the energy generating capacity. However, this leaves the country vulnerable to changes in hydrological conditions, putting the reliability of energy supply at risk. There is great potential to diversify renewable energy resources and harnessing them to contribute towards fulfilling the energy objectives of the country which will result in support for the overall economic development,  increase of the security of energy supply and protection of environment.[7] Moreover, considering the large number of sunny days each year (ranging from about 290 in the north east to 325 in the southwest), the country is well positioned to benefit from low solar power prices.[8] The Energy Regulatory Entity licensed 22 new energy production entities in 2022, with fifteen of them being photovoltaic parks, with a production capacity of over 227,000 MW.[9] While the number of photovoltaic plants reached 27 in 2022, their production is still low, generating around 50,000 MWh of energy out of a total production of 7 million MW in Albania in 2022.

 

Positive market developments that will foster further investments in the renewable sector include the establishment of the Albanian Power Exchange (ALPEX), as a joined venture between the Transmission System Operators of Albania (OST) and Kosovo (KOSTT). In this regard, future coupling with other neighboring markets is expected in accordance with EU electricity market regulations.

 

Harnessing the power of the diaspora

It is worth mentioning that the Albanian diaspora keeps strong ties to their homeland and their families – this can be perfectly illustrated by the remittance influx to the country. A joke that circulates among the diaspora is that “when we were living in Albania we would work all year to have a few days of holidays abroad and now we live abroad and work all yearlong just to have a couple of holidays back home”. This is in part due to cultural aspects, and the fact that people are expected to take care of their parents during their later years or their younger siblings. These societal constructs still hold strongly although one could argue that they may weaken as the country develops into a more individualistic society. In the meantime, there remains a huge opportunity to rethink the approach to the nexus between diaspora and development and find ways to leverage the know-how and economic power of the diaspora.
 
 

A few last words

Albania has been a pleasant surprise for many people visiting it in the last couple of years – no one can deny that the country sits on a wealth of untapped potential. While good guidance from locals is essential to make your return worth the effort, Albania has a lot to offer to the people that decide to invest their time, expertise and funds in the country. At Total Impact Capital Europe, we are working with local teams to set up our own initiatives while also offering support and guidance to internationals looking to invest and do business in this beautiful country.

 

 
References

[1] Source: https://www.instat.gov.al/media/12975/l%C3%ABvizjet-e-shtetasve-n%C3%AB-shqip%C3%ABri-dhjetor-2023-formatuar.pdf

[2] Source: https://www.aida.gov.al/sq/te-reja-publikime/publikime/1245-sektori-i-agrikultures-agroturizmit-dhe-akuakultures-2022

[3] Source: https://www.aida.gov.al/en/business-in-albania/foreign-direct-investments-fdi

[4] Source: OECD, SME Policy Index: Western Balkans and Turkey 2022: Assessing the Implementation of the Small Business Act for Europe

[5] Source: https://www.bankofalbania.org/Politika_Monetare/Analiza_periodike/Tendencat_ne_Kreditim/

[6] Source: https://catalyze-comms.medium.com/equity-investment-can-help-smes-manage-risk-and-grow-40432232889)

[7] Source: https://aida.gov.al/images/PDF/Publikime/Energy-FactSheet.pdf

[8] Source: https://www.ebrd.com/green-economy-albania.pdf

[9] Source: https://ere.gov.al/media/files/2023/04/21/RAPORTI_VJETOR_2022_final.pdf

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