IMPORTANT NOTICE
NOT FOR DISTRIBUTION TO ANY U.S. PERSON OR TO ANY PERSON OR ADDRESS IN THE U.S. IMPORTANT: You must read the following before continuing. The following applies to the Preliminary Prospectus following this page, and you are therefore advised to read this carefully before reading, accessing or making any other use of the Preliminary Prospectus. In accessing the Preliminary Prospectus, you agree to be bound by the following terms and conditions, including any modifications to them any time you receive any information as a result of such access. NOTHING IN THIS ELECTRONIC TRANSMISSION CONSTITUTES AN OFFER OF SECURITIES FOR SALE IN THE UNITED STATES OR ANY OTHER JURISDICTION WHERE IT IS UNLAWFUL TO DO SO. THE SECURITIES DESCRIBED HEREIN HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “ SECURITIES ACT ”), OR THE SECURITIES LAWS OF ANY STATE OF THE U.S. OR OTHER JURISDICTION AND THE SECURITIES DESCRIBED HEREIN MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES, OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT), EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE OR LOCAL SECURITIES LAWS. THE FOLLOWING PRELIMINARY PROSPECTUS MAY NOT BE FORWARDED OR DISTRIBUTED TO ANY OTHER PERSON AND MAY NOT BE REPRODUCED IN ANY MANNER WHATSOEVER, AND IN PARTICULAR, MAY NOT BE FORWARDED TO ANY U.S. PERSON OR TO ANY U.S. ADDRESS. ANY FORWARDING, DISTRIBUTION OR REPRODUCTION OF THIS DOCUMENT IN WHOLE OR IN PART IS UNAUTHORISED. FAILURE TO COMPLY WITH THIS DIRECTIVE MAY RESULT IN A VIOLATION OF THE SECURITIES ACT OR THE APPLICABLE LAWS OF OTHER JURISDICTIONS. Confirmation of Your Representation: In order to be eligible to view this Preliminary Prospectus or make an investment decision with respect to the securities offered pursuant thereto, investors must not be a U.S. person within the meaning of Regulation S under the Securities Act. By accepting the e-mail and accessing this Preliminary Prospectus, you shall be deemed to have represented to the Issuer, Deutsche Bank AG, London Branch and J.P. Morgan Securities Ltd. that you are not a U.S. person; the electronic mail address that you have given to us and to which this e-mail has been delivered is not located in the United States, its territories and possessions (including Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands), any State of the United States or the District of Columbia; and that you consent to delivery of such Preliminary Prospectus by electronic transmission. You are reminded that the Preliminary Prospectus has been delivered to you on the basis that you are a person into whose possession the Preliminary Prospectus may be lawfully delivered in accordance with the laws of the jurisdiction in which you are located and you may not, nor are you authorised to, deliver the Preliminary Prospectus to any other person. The materials relating to the offering of the Notes (the “ Offering ”) do not constitute, and may not be used in connection with, an offer or solicitation in any place where offers or solicitations are not permitted by law. If a jurisdiction requires that the Offering be made by a licensed broker or dealer and the underwriters or any affiliate of the underwriters is a licensed broker or dealer in that jurisdiction, the Offering shall be deemed to be made by the underwriters or such affiliate on behalf of the Issuer in such jurisdiction. Under no circumstances shall this Preliminary Prospectus constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful. This Preliminary Prospectus may only be communicated to persons in the United Kingdom in circumstances where section 21(1) of the Financial Services and Markets Act 2000 does not apply. The Preliminary Prospectus has been sent to you in an electronic form. You are reminded that documents transmitted via this medium may be altered or changed during the process of electronic transmission and consequently none of the Issuer, Deutsche Bank AG, London Branch or J.P. Morgan Securities Ltd., nor any person who controls any of them nor any of their respective directors, officers, employees, agents or affiliates accepts any liability or responsibility whatsoever in respect of any difference between the Preliminary Prospectus distributed to you in electronic format and the hard copy version available to you on request from Deutsche Bank AG, London Branch and J.P. Morgan Securities Ltd. THE REPUBLIC OF ALBANIA €300,000,000 7.50 per cent. Notes due 2015 Issue Price: 99.496 per cent.
The issue price of the €300,000,000 7.50 per cent. Notes due 2015 (the “Notes”) issued by the Republic of LR2.2.7 Albania (the “Issuer”, the “Republic” or “Albania”) is 99.496 per cent. of their principal amount. A13.4.1 A16.3.1 Unless previously redeemed or cancelled, the Notes will be redeemed at their principal amount on 4 A13.4.8 November 2015. The Notes will bear interest from 4 November 2010 at the rate of 7.50 per cent. per annum A13.4.5 payable annually in arrear on 4 November each year commencing on 4 November 2011. Payments on the A13.4.9 Notes will be made in euros without deduction for or on account of taxes imposed by the Issuer to the extent described under “Terms and Conditions of the Notes—Taxation”. This Prospectus has been approved by the United Kingdom Financial Services Authority (the “FSA”), which LR2.2.3 is the United Kingdom competent authority for the purposes of Directive 2003/71/EC (the “Prospectus A13.5.1 Directive”) and relevant implementing measures in the United Kingdom as a prospectus issued in compliance with the Prospectus Directive and relevant implementing measures in the United Kingdom for the purpose of giving information with regard to the issue of the Notes. Applications have been made for the Notes to be admitted to listing on the Official List of the FSA and to trading on the Regulated Market of the London Stock Exchange plc (the “London Stock Exchange”). The Regulated Market of the London Stock Exchange is a regulated market for the purposes of Directive 2004/39/EC on markets in financial instruments. The Notes have not been, and will not be, registered under the United States Securities Act of 1933, as amended (the “Securities Act”) and are subject to United States tax law requirements. The Notes are being offered outside the United States by the Managers (as defined in “Subscription and Sale”) in accordance with Regulation S under the Securities Act (“Regulation S”), and may not be offered, sold or delivered within the United States or to, or for the account or benefit of, U.S. persons except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. The Notes will be in bearer form in denominations of €50,000 and integral multiples of €1,000 in A13.4.2 excess thereof up to and including €99,000. No Notes in Definitive form will be issued with a A13.4.4 denomination above €99,000. The Notes will initially be in the form of a temporary global note (the A13.4.5 “Temporary Global Note”), without interest coupons, which will be deposited on or around A13.4.13 4 November 2010 (the “Closing Date”) with a common depositary for Euroclear Bank SA/NV (“Euroclear”) and Clearstream Banking, société anonyme, Luxembourg (“Clearstream, Luxembourg”). The Temporary Global Note will be exchangeable, in whole or in part, for interests in a permanent global note (the “Permanent Global Note”), without interest coupons, not earlier than 40 days after the Closing Date upon certification as to non-U.S. beneficial ownership. Interest payments in respect of the Notes cannot be collected without such certification of non-U.S. beneficial ownership. The Permanent Global Note will be exchangeable in certain limited circumstances in whole, but not in part, for Notes in definitive form. See “Summary of Provisions Relating to the Notes in Global Form”
Joint Lead Managers A13.7.1
DEUTSCHE BANK J.P. MORGAN Co-Lead Managers
ALPHA BANK Banca IMI BKT 2 November 2010 IMPORTANT NOTICES
The Issuer accepts responsibility for the information contained in this Prospectus and declares that, having A13.1.1 A13.1.2 taken all reasonable care to ensure that such is the case, the information contained in this Prospectus to the A16.1.1 best of its knowledge is in accordance with the facts and contains no omission likely to affect its import. A16.1.2
The Issuer confirms that this Prospectus contains all information regarding the Issuer and the Notes which A13.1.2 is (in the context of the issue of the Notes) material; such information is true and accurate in all material A16.1.2 respects and is not misleading in any material respect; any opinions, predictions or intentions expressed in this Prospectus on the part of the Issuer are honestly held or made and are not misleading in any material respect; this Prospectus does not omit to state any material fact necessary to make such information, opinions, predictions or intentions (in such context) not misleading in any material respect; and all proper enquiries have been made to ascertain and to verify the foregoing.
The Managers (as defined under “ Subscription and Sale ” below) have not separately verified the information contained herein. Accordingly, no representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by the Managers as to the accuracy or completeness of the information contained in this Prospectus or any other information provided by the Issuer in connection with the Notes or their distribution.
No person has been authorised in connection with the offering of the Notes to give any representation or information regarding the Issuer or the Notes other than as contained in this Prospectus or as approved for such purpose by the Issuer Any such representation or information should not be relied upon as having been authorised by the Issuer or the Managers.
Neither the delivery of this Prospectus nor any sales made in connection with the issue of the Notes shall, in any circumstances, create any implication that there has been no change in the affairs of the Issuer since the date of this Prospectus.
This Prospectus does not constitute an offer of, or an invitation to subscribe for or purchase, any Notes.
The distribution of this Prospectus and the offering, sale and delivery of Notes in certain jurisdictions may be restricted by law. Persons into whose possession this Prospectus comes are required by the Issuer and the Managers to inform themselves about and to observe any such restrictions. For a description of certain restrictions on offers, sales and deliveries of Notes and on distribution of this Prospectus and other offering material relating to the Notes, see “ Subscription and Sale ”.
In particular, the Notes have not been and will not be registered under the Securities Act and are subject to United States tax law requirements. Subject to certain exceptions, Notes may not be offered, sold or delivered within the United States or to U.S. persons.
In this Prospectus, unless otherwise specified, references to “ Albania ” are to the Republic of Albania, references to the “ Government ” are to the central government of Albania, references to the “ Parliament ”, the “ Kuvendi ” or the “ Assembly ” are to the Parliament of Albania, references to “ Member State ” are references to a Member State of the European Economic Area, references to to “ ALL ”, “ lek ” or “ leke ” are to the currency of Albania, references to “ €”, “ EUR ” or “ euros ” are to the currency introduced at the start of the third stage of European economic and monetary union, and as defined in Article 2 of Council Regulation (EC) No 974/98 of 3 May 1998 on the introduction of the euro, as amended and references to “US$ ” or “ dollars ” are to the currency of the United States.
Certain figures included in this Prospectus have been subject to rounding adjustments; accordingly, figures shown for the same category presented in different tables may vary slightly and figures shown as totals in certain tables may not be an arithmetic aggregation of the figures which precede them.
In connection with the issue of the Notes, Deutsche Bank AG, London Branch (the “Stabilising Manager”) (or persons acting on behalf of the Stabilising Manager) may over allot Notes or effect transactions with a view to supporting the price of the Notes at a level higher than that which might otherwise prevail. However, there is no assurance that the Stabilising Manager (or persons acting on
ii behalf of a Stabilising Manager) will undertake stabilisation action. Any stabilisation action may begin on or after the date on which adequate public disclosure of the terms of the offer of the Notes is made and, if begun, may be ended at any time, but it must end no later than the earlier of 30 days after the issue date of the Notes and 60 days after the date of the allotment of the Notes. Any stabilisation action or over-allotment must be conducted by the Stabilising Manager (or persons acting on behalf of the Stabilising Manager) in accordance with all applicable laws and rules.
iii EXCHANGE RATES
The following table sets forth the lek to euro and lek to dollar exchange rates for the last day of the periods indicated and the average exchange rates during the periods indicated:
Six months to 30 June 2005 2006 2007 2008 2009 2010 –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– (ALL per €) Year or period end ...... 122.58 123.85 121.78 123.8 137.96 136.45 Average for year or period .... 124.18 123.08 123.63 122.8 132.07 138.00
Source: The Bank of Albania As at 30 September 2010, the lek to euro exchange rate was ALL 138.45 per euro and for the eight month period to 30 September 2010 the average lek to euro exchange rat e was ALL 137 .49 per euro.
Six months to 30 June 2005 2006 2007 2008 2009 2010 ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– (ALL per US$) Year or period end ...... 103.58 94.14 82.89 87.91 95.81 111.44 Average for year or period ..... 99.87 98.10 90.43 83.89 94.98 101.45
Source: The Bank of Albania As at 30 September 2010, the lek to dollar exchange rate was ALL 104.80 per dollar and for the eight month period to 30 September 2010 the average lek to dollar exchange rate was ALL 104.55 per dollar.
iv TABLE OF CONTENTS PR2.2.10
Page
IMPORTANT NOTICES ii
EXCHANGE RATES iv
RISK FACTORS 1
TERMS AND CONDITIONS OF THE NOTES 7
SUMMARY OF PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM 19
USE OF PROCEEDS 21
THE REPUBLIC OF ALBANIA 22
THE ALBANIAN ECONOMY 26
BALANCE OF PAYMENTS AND FOREIGN TRADE 37
PUBLIC DEBT 43
MONETARY AND FINANCIAL SYSTEM 50
PUBLIC FINANCES 59
TAXATION 67
SUBSCRIPTION AND SALE 69
GENERAL INFORMATION 71
v [INTENTIONALLY LEFT BLANK] RISK FACTORS
The Issuer believes that the following factors may affect its ability to fulfil its obligations under the Notes. PR2.2.10 Most of these factors are contingencies which may or may not occur and the Issuer is not in a position to A16.2 express a view on the likelihood of any such contingency occurring. A13.2
In addition, factors which are material for the purpose of assessing the market risks associated with the Notes are described below.
The Issuer believes that the factors described below represent the principal risks inherent in investing in the Notes, but the inability of the Issuer to pay interest, principal or other amounts on or in connection with the Notes may occur for other reasons which may not be considered significant risks by the issuer based on information currently available to it or which it may not currently be able to anticipate.
Prospective investors should read the entire Prospectus and reach their own views prior to making any investment decision. Words and expressions defined in the “Terms and Conditions of the Notes” below or elsewhere in this Prospectus have the same meanings in this section.
Ris ks Relating to Albania
Emerging Market Risks Investments in securities of sovereign or corporate issuers in emerging markets, such as Albania, involve a higher degree of risk than investments in securities of issuers in more developed markets. These higher risks include economic instability caused by a variety of factors such as a narrow export base, reliance on imports, fiscal and current account deficits, reliance on foreign investment, high unemployment and changes in the political, economic, social, legal and regulatory environment. Actions of governments may be challenged by future governments. Emerging economies, such as the Albanian economy, are subject to rapid change and are vulnerable to market conditions and economic downturns elsewhere in the world. Emerging markets , such as Albania, may also experience more instances of corruption of government and judicial officials and misuse of public funds than more mature markets.
As a consequence, an investment in Albania carries risks that are not typically associated with investing in more mature markets. These risks may be compounded by incomplete, inaccurate, unreliable or unavailable economic and statistical data on Albani a. Prospective investors should also note that emerging economies such as Albania’s are subject to rapid change and that the information set out in this Prospectus may become outdated relatively quickly. Accordingly, prospective investors should exercise particular care in evaluating the risks involved and must decide for themselves whether, in light of those risks, their investment is appropriate. Generally, investment in emerging markets , such as Albania, is suitable only for sophisticated investors who fully appreciate the significance of the risks involved. Prospective investors are urged to consult with their own legal and financial advisers before making an investment decision.
Political and Economic Uncertainty Albania has undergone major changes during its recent history. Many political and economic reforms have taken place but Albania’s economy still has a number of structural weaknesses including high unemployment, unrestructured industry and relatively low levels of exports compared to imports, each of which may affect Albania’s creditworthiness. Albania’s current Government is in power on the basis of a very small majority and therefore may require the support of the opposition in order to pass certain legislation, which could impact on the timing of legislative reform . The main opposition political party boycotted Parliament from September 2009 to May 2010 (but did return for one session in February 2010) over alleged voting irregularities in the most recent parliamentary election, which took place in June 2009. There is no guarantee that the current Government will remain stable or that important structural reforms will be implemented successfully, and Albania faces a number of challenges ahead. Changes in Albania’s political environment may affect the stability of the Albanian economy, which could compromise Albania’s capacity to service the Notes.
1 Albania has recently experienced some slowing of growth and other adverse economic and financial effects as a result of the global financial crisis. Albania could be adversely affected by economi c weakness and fiscal difficulties in neighbouring countries, such as Greece and Italy. Albania also has certain exposure to neighbouring countries such as Greece and Italy due to ownership by banks in such countries of a portion of Albanian banking assets and Albanian government debt and due to the Albanian economy’s dependence on remittances from Albanians in such countries . Remittances from Albanians working abroad and exports both decreased in 2009 as compared to 2008. Albania’s budget was revised in December 2009, in part because budget revenues in 2009 were negatively affected by lower than expected economic growth. There can be no assurance that global economic events will not adversely affect Albania’s economy and its ability to raise capital in the external debt markets in the future.
High Level of Debt Albania’s expansionary fiscal policy increased the public debt to almost 60 per cent. of GDP at the end of 2009 as compared to 55 per cent. of GDP at the end of 2008. While a large portion of Albania’s external debt is on concessional terms (i.e . loans at below market terms with the aim of achieving a certain objective), the overall level of debt is nonetheless high. In 2009, Albania’s debt service cost for interest was 3.17 per cent. of GDP. Any significant future borrowings could increase the risk of external debt distress. Increased levels of debt through continued borrowing or decreases in GDP may negatively impact Albania’s sovereign credit rating or may impair Albania’s ability to service the Notes. In addition, as the majority of Albania’s domestic debt is short-term and needs to be refinanced within a 12-month period, there is a high level of refinancing risk associated with such debt.
Balance of Payments Albania’s trade imbalance is considerable. Albania continues to be an import-oriented economy and the export base remains small, narrow and undiversified, due mainly to a lack of price competitiveness, and poor infrastructure. Albania’s economy’s has a high dependence on remittances from Albanians working abroad (approximately half of which are from Greece) which have traditionally served to offset its trade imbalance, but which are susceptible to fluctuations. Albania’s large current account deficit is an indicator that macroeconomic stability has not yet been achieved. Financing Albania’s large trade and current account deficits will be among the key macroeconomic challenges for Albania going forward.
Fiscal Risks Albania faces fiscal risks. For example, as a result of constraints on the Albanian energy sector, Government finances can be adversely affected by energy import costs and compensation payments made to the state- owned power generation company. Fiscal risks also arise from Albania’s pension system, which is financed on a pay-as-you-go basis whereby state benefits are paid out of contributions from the current workforce. Albania’s 2009 consolidated budget was revised on 23 December 2009, in part to address lower than expected budget revenues. The 2009 budget deficit is estimated to be 6.9 per cent. of GDP (4.5 per cent. of GDP if the expenditure undertaken only upon receipt of privatisation receipts is excluded ). See “ Public Finances—Budget Deficits ”.
The 2010 consolidated budget, as revised in July 2010, is based on assumptions of 4.1 per cent. growth in real GDP and a 11.4 per cent. increase in revenues from 200 9. This would result in a deficit amounting to 3.1 per cent. of GDP for 2010 . The actual results of the budget may differ materially from the assumptions underlying the current budget. Revenues are projected to increase by 8.5 per cent. from 2009. The Ministry of Finance intends to rely on contingencies (which are expenditures that are planned to be executed only if revenue targets are met) amounting to 0.4 per cent. of GDP included in the budget and, if necessary, expenditure cuts, in order to control the deficit . There can be no assurance that recently implemented reforms will be effective in supporting economic growth. The phasing out of fiscal stimulus, which supported economic growth in 2009, could lead to economic weakness if not accompanied by a solid recovery of private expenditure.
2 Banking Sector Strong private credit expansion has been one of the main drivers of economic growth in Albania in recent years. Although the Albanian banking sector has not thus far been significantly affected by the global financial crisis , experience from emerging as well as developed economies indicates that the risk of a delayed deterioration in the quality of banks’ loan portfolios exists, especially in the scenario of further recession in Europe. The share of non-performing loans to total loans in the Albania n banking sector has accelerated recently, reaching 10.5 per cent. in 2009 from 6. 6 per cent. in 2008. Although provisioning covered 51 per cent. of non-performing loans by the end of 2009, expectations of further asset quality deterioration could prompt banks to reduce lending. This could have an adverse impact on the Albanian banking sector and the economy as a whole.
With approximately 70 per cent. of loans in the Albanian banking sector denominated in foreign currency, primarily in euro, the Albanian economy is highly euroised. A high level of euroisation increases banking sector risks and requires high capital and reserves in order to protect against unfavourable exchange rate movements and the credit risks of unhedged loan portfolios. Albania’s banking sector also has a high level of foreign currency deposits, which limits the Bank of Albania’s ability to act as the lender of last resort should it be required to help in case of a run on a bank.
Although support by foreign banks of their Albanian subsidiaries has remained resilient, difficulties at the parent level could negatively affect support for their subsidiaries in Albania. If this were to be the case, lending growth could be negatively impacted and refinancing of liabilities made more difficult, as foreign currency lending is a large proportion of Albanian banks’ assets.
Exchange Rates and Inflation The lek is subject to a free-floating exchange rate regime, whereby the value of the lek against foreign currencies is freely determined in the market. The ability of the Government and the Bank of Albania to control volatility of the lek will depend on a number of political and economic factors, including th eir ability to control inflation, the availability of foreign currency reserves and FDI inflows. In 2009, the lek depreciated against the euro by 7.6 per cent. and against the U.S. dollar by 13 per cent. A further significant depreciation of the lek could adversely affect the country’s economic and financial condition. The Bank of Albania targets a rate of inflation of 3.0 per cent., with a +/-1 per cent. tolerance around that target. Although the rate of inflation has been stable in recent years, any trend towards high and sustained inflation could lead to market instability, a financial crisis, a reduction in consumer purchasing power and erosion of consumer confidence.
EU Accession Albania is working towards EU membership, although at present such membership remains both distant and uncertain. The timing of accession of each country to the EU, including Albania, depends on the progress that it makes in preparing for membership, according to criteria defined by the European Council in Copenhagen 1993. The Copenhagen criteria require:
• Stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities;
• The existence of a functioning market economy as well as the capacity to cope with competitive pressure and market forces within the EU; and
• The ability to take on the obligations of membership, including adherence to the aims of the political, economic and monetary union.
Like many emerging markets countries, Albania has not yet achieved these criteria in whole. While Albania is confident that it will be able to satisfy the criteria that are necessary for EU membership in due course, there can be no assurance that Albania will be able to accede to the EU in any given time period or at all.
3 Risks Related to the Notes Generally The Notes may not be a suitable investment for all investors Each potential investor in the Notes must determine the suitability of an investment in light of its own circumstances. In particular, each potential investor should: (i) have sufficient knowledge and experience to make a meaningful evaluation of the Notes, the merits and risks of investing in the Notes and the information contained in this Prospectus and any applicable supplement; (ii) have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Notes and the impact the Notes will have on its overall investment portfolio; (iii) have sufficient financial resources and liquidity to bear all of the risks of an investment in the Notes, including the euro, which is the currency for principal and interest payments, is different from the potential investor’s currency; (iv) understand thoroughly the terms of the Notes and be familiar with the behaviour of any relevant financial markets; and (v) be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.
Enforcement of Court Judgment s It may not be possible to effect service of process against Albania in courts outside Albania or in a jurisdiction to which Albania has not explicitly submitte d, and the choice of jurisdiction of a foreign court (including English courts) in contractual agreements may be held to be invalid by an Albanian court. It may not be possible in the courts of Albania to enforce foreign court judgments, including English court judgments, against Albania that are predicated upon the laws of foreign jurisdictions without a re- examination of the merits of such judgment in the Albanian courts. Moreover, there have been instances where the independence of the judiciary has been brought into question.
Albania is a sovereign state. There is a risk that, notwithstanding the limited waiver of sovereign immunity by Albania in connection with the Notes, a claimant will not be able to have the foreign court judgmen t recognised in Albania or to enforce a court judgmen t against certain assets of Albania in certain jurisdictions, including Albania (including the imposition of any arrest order or attachment or seizure of such assets and their subsequent sale), without Albania having specifically consented to such enforcement at the time when the enforcement is sought. See “ Terms and Conditions of the Notes—Governing Law and Jurisdiction ”. In addition, certain state-owned assets are statutorily exempt from court enforcement procedures within Albania. Specifically, the Issuer has not waived any immunity in respect of (i) present or future “premises of the mission” as defined in Vienna Convention on Diplomatic Relations signed in 1961 or present or future “consular premises” as defined in Vienna Convention on Consular Relations signed in 1963 or otherwise used by a diplomat or diplomatic mission of Albania or any agency or instrumentality thereof; or (ii) any immovable property which falls under provisions of paragraph 1 to 3 of article 3 of Albanian Law No. 8743, dated 22 February 2001 “On the state immovable properties”.
The foreign exchange reserves of Albania are controlled and administered by the Bank of Albania, which is an independent central bank legally distinct from the Government. Such reserves will not be available to satisfy any claim or judgment in respect of the Notes.
Modification The Conditions of the Notes contain provisions for calling meetings of holders of the Notes (“ Noteholders ”) to consider matters affecting their interests generally. These provisions permit defined majorities to bind all Noteholders including Noteholders who did not attend and vote at the relevant meeting and Noteholders who voted in a manner contrary to the majority.
4 There is no active trading market for the Note s The Notes are new securities which may not be widely distributed and for which there is currently no active trading market. If the Notes are traded after their initial issuance, they may trade at a discount to their initial offering price, depending upon prevailing interest rates, the market for similar securities, general economic conditions and the financial condition of the Issuer. Although application has been made for the Notes to be admitted to listing on the Official List of the FSA and to trading on the Regulated Market of the London Stock Exchange, there is no assurance that such application will be accepted or that an active trading market will develop. Accordingly, there is no assurance as to the development or liquidity of any trading market for the Notes.
Because the Global Notes are held by or on behalf of Euroclear and Clearstream, Luxembourg, investors will have to rely on their procedures for transfer, payment and communication with the Issue r
The Notes will be represented by the Global Notes, except in certain limited circumstances described in the A13.4.4 Permanent Global Note. The Global Notes will be deposited with a common depositary for Euroclear and Clearstream, Luxembourg. Except in certain limited circumstances described in the Permanent Global Note, investors will not be entitled to receive definitive Notes. Euroclear and Clearstream, Luxembourg will maintain records of the beneficial interests in the Global Notes. While the Notes are represented by the Global Notes, investors will be able to trade their beneficial interests only through Euroclear and Clearstream, Luxembourg.
The Issuer will discharge its payment obligations under the Notes by making payments to or to the order of A13.4.7 the common depositary for Euroclear and Clearstream, Luxembourg for distribution to their account holders. A holder of a beneficial interest in a Global Note must rely on the procedures of Euroclear and Clearstream, Luxembourg to receive payments under the Notes. The Issuer has no responsibility or liability for the records relating to, or payments made in respect of, beneficial interests in the Global Notes.
Holders of beneficial interests in the Global Notes will not have a direct right to vote in respect of the Notes. Instead, such holders will be permitted to act only to the extent that they are enabled by Euroclear and Clearstream, Luxembourg to appoint appropriate proxies. Similarly, holders of beneficial interests in the Global Notes will not have a direct right under the Global Notes to take enforcement action against the Issuer in the event of a default under the Notes but will have to rely upon their rights under the Deed of Covenant.
Denominations involve integral multiples: definitive Notes The Notes have a denomination consisting of a minimum denomination of €50,000 plus integral multiples of €1,000 in excess thereof up to and including €99,000. It is possible that the Notes may be traded in amounts in excess of €50,000 (or its equivalent) that are not integral multiples of €50,000. In such case a Noteholder who, as a result of trading such amounts, holds a principal amount of less than €50,000 in the account with the relevant clearing system of the relevant time may not receive a Definitive Note in respect of such holding (should Definitive Notes be printed) and would need to purchase a principal amount of Notes such that its holding amounts to at least €50,000. Noteholders should be aware that Definitive Notes which have a denomination that is not an integral multiple of €50,000 may b e illiquid and difficult to trade.
Albania’s Credit Ratings A13.7.5 Long-term debt of Albania is currently rated B1 (Outlook Stable) by Moody’s Investors Service and B+ (Outlook Stable ) by Standard and Poor’s. A security rating is not a recommendation to buy, sell or hold securities and may be subject to suspension, reduction or withdrawal at any time by the assigning rating agency. Any adverse change in an applicable credit rating could adversely affect the trading price for the Notes. The current ratings are sub-investment grade. They indicate that the Notes are regarded as having significant speculative characteristics and that there are major ongoing uncertainties or exposure to financial or economic conditions which could compromise Albania’s capacity to meet its financial commitment on the Notes.
5 EU Savings Directive Under EC Council Directive 2003/48/EC on the taxation of savings income, each Member State is required to provide to the tax authorities of another Member State details of payments of interest or other similar income paid by a person within its jurisdiction to, or collected by such a person for, an individual resident or certain limited types of entity established in that other Member State; however, for a transitional period, Austria, Belgium and Luxembourg may instead apply a withholding system in relation to such payments, deducting tax at rates rising over time to 35 per cent. The transitional period is to terminate at the end of the first full fiscal year following agreement by certain non-EU countries to the exchange of information relating to such payments. Belgium has replaced this withholding tax with a regime of exchange of information to the Member State of residence as from 1 January 2010.
A number of non-EU countries and certain dependent or associated territories of certain Member States have adopted similar measures (either provision of information or transitional withholding) in relation to payments made by a person within its jurisdiction to, or collected by such a person for, an individual resident or certain limited types of entity established in a Member State. In addition, the Member States have entered into provision of information or transitional withholding arrangements with certain of those dependent or associated territories in relation to payments made by a person in a Member State to, or collected by such a person for, an individual resident or certain limited types of entity established in one of those territories.
On 13 November 2008 the European Commission published a proposal for amendments to the Directive, which included a number of suggested changes which, if implemented, would broaden the scope of the requirements described above. The European Parliament approved an amended version of this proposal on 24 April 2009. Investors who are in any doubt as to their position should consult their professional advisers.
If a payment were to be made or collected through a Member State which has opted for a withholding system and an amount of, or in respect of, tax were to be withheld from that payment, neither the Issuer nor any agent nor any other person would be obliged to pay additional amounts with respect to any Note as a result of the imposition of such withholding tax. The Issuer is required to maintain an agen t in a Member State that is not obliged to withhold or deduct tax pursuant to the Directive.
Change of law The Notes are governed by English law. No assurance can be given as to the impact of any possible judicial decision or change to English law or administrative practice after the date of this Prospectus.
Legal investment considerations may restrict certain investments The investment activities of certain investors are subject to legal investment laws and regulations, or review or regulation by certain authorities. Each potential investor should consult its legal advisors to determine whether and to what extent (1) the Notes are legal investments for it, (2) the Notes can be used as collateral for various types of borrowing and (3) other restrictions apply to its purchase or pledge of the Notes. Financial institutions should consult their legal advisors or the appropriate regulators to determine the appropriate treatment of the Notes under any applicable risk-based capital or similar rules.
6 TERMS AND CONDITIONS OF THE NOTES
The following is the text of the Terms and Conditions of the Notes which (subject to completion and A13.4.7 amendment) will be endorsed on each Note in definitive form: A13.4.8 The €300,000,0007. 50 percent.Notesdue 201 5 (the“ Notes ”,whichexpressionincludesanyfurthernotes A13.4.9 issuedpursuanttoCondition 14 (Further Issues )andformingasingleseriestherewith)oftheRepublicof A13.4.5 Albania(the“ Issuer ”),representedbytheCouncilofMinisters,actingthroughitsMinisterofFinanceare A13.4.1 thesubjectofafiscalagencyagreementdated 4Novembe r 2010(asamendedorsupplementedfromtimeto time,the“ Agency Agreement ”)betweentheIssuer,DeutscheBankAG,LondonBranchasfiscalagent(the “Fiscal Agent ”,whichexpressionincludesanysuccessorfiscalagentappointedfromtimetotimein A13.5.2. connectionwiththeNotes)andthepayingagentsnamedtherein(togetherwiththeFiscalAgent,the“ Paying Agents ”,whichexpressionincludesanysuccessororadditionalpayingagentsappointedfromtimetotime inconnectionwiththeNotes).CertainprovisionsoftheseConditionsaresummariesoftheAgency Agreementandsubjecttoitsdetailedprovisions.TheholdersoftheNotes(the“ Noteholders ”)andthe A16.8(b) holdersoftherelatedinterestcoupons(the“ Couponholders ”andthe“ Coupons ”,respectively)arebound by,andaredeemedtohavenoticeof,alltheprovisionsoftheAgencyAgreementapplicabletothem.Copies oftheAgencyAgreementareavailableforinspectionbyNoteholdersduringnormalbusinesshoursatthe SpecifiedOffices(asdefinedintheAgencyAgreement)ofeachofthePayingAgents,theinitialSpecified Officesofwhicharesetoutbelow.
1. Form, Denomination and Title TheNotesareseriallynumberedandinbearerformindenominationsof€50,000andintegralmultiplesof A13.4.4 €1,000inexcessthereofuptoandincluding€99,999,eachwithCouponsattachedatthetimeofissue.Notes A13.4.2 ofonedenominationwillnotbeexchangeableforNotesofanotherdenomination.TitletotheNotesandthe Couponswillpassbydelivery.TheholderofanyNoteorCouponshall(exceptasotherwiserequiredbylaw) betreatedasitsabsoluteownerforallpurposes(whetherornotitisoverdueandregardlessofanynoticeof ownership,trustoranyotherinteresttherein,anywritingthereonoranynoticeofanypreviouslossortheft thereof)andnopersonshallbeliableforsotreatingsuchholder.Nopersonshallhaveanyrighttoenforce anytermorconditionoftheNotesundertheContracts(RightsofThirdParties)Act1999.
2. Status TheNotesconstitutedirect,generalandunconditionalobligationsoftheIssuerwhichwillatalltimesrank A13.4.6 pari passu amongthemselvesandatleast pari passu withallotherpresentandfutureunsecuredobligations oftheIssuer,saveforsuchobligationsasmaybepreferredbyprovisionsoflawthatarebothmandatoryand ofgeneralapplication.
3. Negative Pledge SolongasanyNoteremainsoutstanding(asdefinedintheAgencyAgreement)theIssuerwillnotcreateor permittosubsistanySecurityInterest(asdefinedbelow)otherthanaPermittedSecurityInterest(asdefined below)inanyofitspropertyorassetstosecurePublicExternalIndebtednessoftheIssuerunless(i)the NotesaresecuredequallyandrateablywithsuchPublicExternalIndebtednessor(ii)theNoteshavethe benefitofsuchothersecurity,guarantee,indemnityorotherarrangementasshallbesubstantiallyequivalent.
IntheseConditions:
“Permitted Security Interest ”means:
(a) anySecurityInterestuponproperty(oranyrevenuestherefrom)tosecurePublicExternal Indebtednessincurredforthepurposeoffinancingtheacquisitionorconstructionofsuchproperty;
(b) anySecurityInterestexistingonanyproperty(oranyrevenuestherefrom)atthetimeofits acquisition;
7 (c) anySecurityInterestsecuringPublicExternalIndebtednessincurredforthepurposeofProject Financingprovidedthat(i)theholdersofsuchPublicExternalIndebtednessexpresslyagreetolimit theirrecoursetotheassetsandrevenuesofsuchprojectastheprincipalsourceofrepaymentofsuch PublicExternalIndebtednessand(ii)thepropertyoverwhichsuchSecurityInterestisgranted consistssolelyofsuchassetsandrevenues;
(d) anySecurityInterestexistingontheoriginaldateofissueoftheNotes;and
(e) therenewalorextensionofanySecurityInterestdescribedinsubparagraphs(a)to(d)above,provided thattheprincipalamountofthePublicExternalIndebtednesssecuredtherebyisnotincreased.
“Project Financing ”meansanyarrangementfortheprovisionoffundswhicharetobeusedsolelyto financeaprojectfortheacquisition,construction,development,orexploitationofanyproperty.
“Public External Indebtedness ”meansanyobligations(otherthantheNotes)forborrowedmoniesthatare (i)denominatedorpayableinacurrencyorbyreferencetoacurrencyotherthanthelawfulcurrencyofthe RepublicofAlbaniaand(ii)evidencedorrepresentedbybonds,notesorothersecuritieswhichareforthe timebeingorarecapableofbeingorintendedtobequoted,listedorordinarilydealtinonanystock exchange,automatedtradingsystem,over-the-counterorothersecuritiesmarket.
“Security Interest ”meanslien,pledge,mortgage,securityinterest,chargeorotherencumbranceor preferentialarrangementwhichhasthepracticaleffectofconstitutingasecurityinterest.
4. Interest TheNotesbearinterestfrom 4Novembe r 2010(the“ Issue Date ”),attherateof 7. 50 percent.perannum, A13.4.8 (the“ Rate of Interest ”)payableinarrearon 4Novembe r ineachyear(each,an“ Interest Payment Date ”), A13.4.13 subjectasprovidedinCondition 6(Payments ).
EachNotewillceasetobearinterestfromtheduedateforredemptionunless,uponduepresentation, paymentofprincipalisimproperlywithheldorrefused,inwhichcaseitwillcontinuetobearinterestatsuch rate(bothbeforeandafterjudgment)untilwhicheveristheearlierof(a)thedayonwhichallsumsduein respectofsuchNoteuptothatdayarereceivedbyoronbehalfoftherelevantNoteholderand(b)theday whichissevendaysaftertheFiscalAgenthasnotifiedtheNoteholdersthatithasreceivedallsumsduein respectoftheNotesuptosuchseventhday(excepttotheextentthatthereisanysubsequentdefaultin payment).
TheamountofinterestpayableoneachInterestPaymentDateshallbe €75.0 0 perCalculationAmount.If interestisrequiredtobepaidinrespectofaNoteonanyotherdate,itshallbecalculatedbyapplyingthe RateofInteresttotheCalculationAmount,multiplyingtheproductbytherelevantDayCountFractionand roundingtheresultingfiguretothenearestcent(halfacentbeingroundedupwards)andmultiplyingsuch roundedfigurebyafractionequaltothedenominationofsuchNotedividedbytheCalculationAmount, where:
“Calculation Amount ”means€1,000;
“Day Count Fraction ”means,inrespectofanyperiod,thenumberofdaysintherelevantperiod,from(and including)thefirstdayinsuchperiodto(butexcluding)thelastdayinsuchperiod,dividedbythenumber ofdaysintheRegularPeriodinwhichtherelevantperiodfalls;and
“Regular Period ”meanseachperiodfrom(andincluding)theIssueDateoranyInterestPaymentDateto (butexcluding)thenextInterestPaymentDate.
5. Redemption and Purchase A13.4.9 (a) Scheduled redemption: Unlesspreviouslyredeemed,orpurchasedandcancelled,theNoteswillbe redeemedattheirprincipalamounton 4November201 5,subjectasprovidedinCondition 6 (Payments ).
8 (b) No other redemption: TheIssuershallnotbeentitledtoredeemtheNotesotherwisethanasprovided inparagraph(a)( Scheduled redemption )above.
(c) Purchase: TheIssuermayatanytimepurchaseNotesintheopenmarketorotherwiseandatany price, provided that allunmaturedCouponsarepurchasedtherewith.
(d) Cancellation: AllNotessoredeemedorpurchasedbytheIssuerorandanyunmaturedCoupons attachedtoorsurrenderedwiththemshallbecancelledandmaynotbereissuedorresold.
6. Payments (a) Principal: Paymentsofprincipalshallbemadeonlyagainstpresentationand( provided that payment ismadeinfull)surrenderofNotesattheSpecifiedOfficeofanyPayingAgentoutsidetheUnited Statesby Eurochequedrawnon,orbytransfertoa Euroaccount(orotheraccounttowhich Euromay becreditedortransferred)maintainedbythepayeewith,abankinacityinwhichbankshaveaccess totheTARGETSystem.
(b) Interest: Paymentsofinterestshall,subjecttoparagraph(g)( Payments other than in respect of matured Coupons )below,bemadeonlyagainstpresentationand( provided that paymentismadein full)surrenderoftheappropriateCouponsattheSpecifiedOfficeofanyPayingAgentoutsidethe UnitedStatesinthemannerdescribedinparagraph(a)( Principal )above.
(c) Interpretation:IntheseConditions:
“TARGET System ”meanstheTrans-EuropeanAutomatedReal-TimeGrossSettlementExpress Transferpaymentsystemwhichutilisesasinglesharedplatformandwhichwaslaunchedon19 November2007
(d) Payments subject to fiscal laws: AllpaymentsinrespectoftheNotesaresubjectinallcasestoany applicablefiscalorotherlawsandregulationsintheplaceofpayment,butwithoutprejudicetothe provisionsofCondition 7(Taxation ).Nocommissionsorexpensesshallbechargedtothe NoteholdersorCouponholdersinrespectofsuchpayments.
(e) Deduction for unmatured Coupons: IfaNoteispresentedwithoutallunmaturedCouponsrelating thereto,then:
(i) iftheaggregateamountofthemissingCouponsislessthanorequaltotheamountofprincipal dueforpayment,asumequaltotheaggregateamountofthemissingCouponswillbededucted fromtheamountofprincipaldueforpayment;provided,however,thatifthegrossamount availableforpaymentislessthantheamountofprincipaldueforpayment,thesumdeducted willbethatproportionoftheaggregateamountofsuchmissingCouponswhichthegross amountactuallyavailableforpaymentbearstotheamountofprincipaldueforpayment;
(ii) iftheaggregateamountofthemissingCouponsisgreaterthantheamountofprincipalduefor payment:
(A) somanyofsuchmissingCouponsshallbecomevoid(ininverseorderofmaturity)as willresultintheaggregateamountoftheremainderofsuchmissingCoupons(the “Relevant Coupons ”)beingequaltotheamountofprincipaldueforpayment; provided, however, that wherethissub-paragraphwouldotherwiserequireafractionof amissingCoupontobecomevoid,suchmissingCouponshallbecomevoidinits entirety;and
(B) asumequaltotheaggregateamountoftheRelevantCoupons(or,ifless,theamountof principaldueforpayment)willbedeductedfromtheamountofprincipalduefor payment; provided, however ,that,ifthegrossamountavailableforpaymentislessthan theamountofprincipaldueforpayment,thesumdeductedwillbethatproportionofthe aggregateamountoftheRelevantCoupons(or,asthecasemaybe,theamountof
9 principaldueforpayment)whichthegrossamountactuallyavailableforpaymentbears totheamountofprincipaldueforpayment.
Eachsumofprincipalsodeductedshallbepaidinthemannerprovidedinparagraph(a)( Principal ) aboveagainstpresentationand( provided that paymentismadeinfull)surrenderoftherelevant missingCoupons.NopaymentswillbemadeinrespectofvoidCoupons.
(f) Payments on business days: IftheduedateforpaymentofanyamountinrespectofanyNoteor Couponisnotabusinessdayintheplaceofpresentation,theholdershallnotbeentitledtopayment insuchplaceoftheamountdueuntilthenextsucceedingbusinessdayinsuchplaceandshallnotbe entitledtoanyfurtherinterestorotherpaymentinrespectofanysuchdelay.Inthisparagraph, “business day ”means,inrespectofanyplaceofpresentation,anydayonwhichbanksareopenfor presentationandpaymentofbearerdebtsecuritiesandfordealingsinforeigncurrenciesinsuchplace ofpresentationand,inthecaseofpaymentbytransfertoa Euroaccountasreferredtoabove,on whichtheTARGETSystemisopen.
(g) Payments other than in respect of matured Coupons: Paymentsofinterestotherthaninrespectof maturedCouponsshallbemadeonlyagainstpresentationoftherelevantNotesattheSpecifiedOffice ofanyPayingAgentoutsidetheUnitedStates.
(h) Partial payments: IfaPayingAgentmakesapartialpaymentinrespectofanyNoteorCoupon presentedtoitforpayment,suchPayingAgentwillendorsethereonastatementindicatingtheamount anddateofsuchpayment.
7. Taxation AllpaymentsofprincipalandinterestinrespectoftheNotesandtheCouponsbyoronbehalfoftheIssuer shallbemadefreeandclearof,andwithoutwithholdingordeductionfororonaccountof,anypresentor futuretaxes,duties,assessmentsorgovernmentalchargesofwhatevernatureimposed,levied,collected, withheldorassessedbyoronbehalfoftheRepublicofAlbaniaoranypoliticalsubdivisionthereoforany authoritythereinorthereofhavingpowertotax,unlessthewithholdingordeductionofsuchtaxes,duties, assessmentsorgovernmentalchargesisrequiredbylaw.InthateventtheIssuershallpaysuchadditional amountsaswillresultinreceiptbytheNoteholdersandtheCouponholdersaftersuchwithholdingor deductionofsuchamountsaswouldhavebeenreceivedbythemhadnosuchwithholdingordeductionbeen required,exceptthatnosuchadditionalamountsshallbepayableinrespectofanyNoteorCouponpresented forpayment:
(a) byoronbehalfofaholderwhichisliabletosuchtaxes,duties,assessmentsorgovernmentalcharges inrespectofsuchNoteorCouponbyreasonofitshavingsomeconnectionwiththeRepublicof AlbaniaotherthanthemereholdingoftheNoteorCoupon;or
(b) wheresuchwithholdingordeductionisimposedonapaymenttoanindividualandisrequiredtobe madepursuanttoEuropeanCouncilDirective2003/48/EConthetaxationofsavingsincomeorany lawimplementingorcomplyingwith,orintroducedinordertoconformto,thisDirective;or
(c) byoronbehalfofaholderwhowouldhavebeenabletoavoidsuchwithholdingordeductionby presentingtherelevantNoteorCoupontoanotherPayingAgentinamemberstateoftheEuropean Union;or
(d) morethan30daysaftertheRelevantDateexcepttotheextentthattheholderofsuchNoteorCoupon wouldhavebeenentitledtosuchadditionalamountsonpresentingsuchNoteorCouponforpayment onthelastdayofsuchperiodof30days.
IntheseConditions,“ Relevant Date ”meanswhicheveristhelaterof(1)thedateonwhichthepaymentin questionfirstbecomesdueand(2)ifthefullamountpayablehasnotbeenreceivedinacityinwhichbanks haveaccesstotheTARGETSystembytheFiscalAgentonorpriortosuchduedate,thedateonwhich(the fullamounthavingbeensoreceived)noticetothateffecthasbeengiventotheNoteholders.
10 AnyreferenceintheseConditionstoprincipalorinterestshallbedeemedtoincludeanyadditionalamounts inrespectofprincipalorinterest(asthecasemaybe)whichmaybepayableunderthisCondition 7 (Taxation ).
8. Events of Default Ifanyofthefollowingevents(eachan“ Event of Default ”)occursandiscontinuing:
(a) Non-payment: anyamountofprincipalisnotpaidontheduedateforpaymentthereoforanyamount ofinterestontheNotesisnotpaidwithin15daysoftheduedateforpaymentthereof;or
(b) Breach of other obligations: theRepublicofAlbaniadoesnotperformorcomplywithanyoneor moreofitsotherobligationsundertheNotes,whichdefaultisincapableofremedyor,ifcapableof remedy,isnotremediedwithin30daysafternoticeofsuchdefaulthasbeengiventotheRepublicof AlbaniaatthespecifiedofficeoftheFiscalAgentbyanyholderofNotes;or
(c) Cross-defaultofIssuer:
(i) theholdersofanyPublicExternalIndebtednessoftheRepublicofAlbaniaacceleratesuch PublicExternalIndebtednessordeclaresuchPublicExternalIndebtednesstobedueand payable,orrequiredtobeprepaid(otherthanbyaregularlyscheduledrequiredpayment),prior totheoriginallystatedmaturitythereof;or
(ii) theRepublicofAlbaniafailstopayinfullanyprincipalof,orintereston,anyPublicExternal Indebtednesswhendue(afterexpirationofanyoriginallyapplicablegraceperiod)orany GuaranteeofanyPublicExternalIndebtednessgivenbytheRepublicofAlbaniashallnotbe honouredwhendueandcalledupon(aftertheexpirationofanyoriginallyapplicablegrace period);providedthattheaggregateamountoftherelevantPublicExternalIndebtednessor Guaranteeinrespectofwhichoneormoreoftheeventsmentionedaboveinthisparagraph (c) shallhaveoccurredequalsorexceeds €20,000,000oritsequivalentinothercurrencies;or
(d) Moratorium: theRepublicofAlbaniashallsuspendpaymentof,oradmititsinabilitytopay,itsPublic ExternalIndebtednessoranypartthereofordeclareageneralmoratoriumonorinrespectofitsPublic ExternalIndebtednessoranypartthereof,oranythinganalogoustotheforegoingshalloccur;or
(e) Unlawfulness or Invalidity: thevalidityoftheNotesiscontestedbytheRepublicofAlbaniaorthe RepublicofAlbaniashalldenyanyofitsobligationsundertheNotesoritisorbecomesunlawfulfor theRepublicofAlbaniatoperformorcomplywithalloranyofitsobligationssetoutintheNotesor anyofsuchobligationsshallbeorbecomeunenforceableorinvalid;or
(f) International Monetary Fund: theRepublicofAlbaniaceasestobeamemberoftheInternational MonetaryFundorshallceasetobeeligibletousethegeneralresourcesoftheInternationalMonetary Fund;or
(g) Consents etc.: anyregulation,decree,consent,approval,licenceorotherauthoritynecessarytoenable theIssuertoperformitsobligationsundertheNotesortheAgencyAgreementorforthevalidityor enforceabilitythereofexpiresoriswithheld,revokedorterminatedorotherwiseceasestoremainin fullforceandeffectorismodifiedinamannerwhichadverselyaffectsanyrightorclaimofanyof theNoteholdersinrespectofanypaymentduepursuanttotheseConditions, thentheholdersofatleast25percent.inaggregateprincipalamountoftheoutstandingNotesmay,bynotice inwritingtotheIssuer(withacopytotheFiscalAgent),declarealltheNotestobeimmediatelydueand payable,whereupontheyshallbecomeimmediatelydueandpayableattheirprincipalamounttogetherwith accruedinterestwithoutfurtheractionorformality.Noticeofanysuchdeclarationshallpromptlybegiven toallotherNoteholdersbytheIssuer.IftheIssuerreceivesnoticeinwritingfromholdersofatleast50per cent.inaggregateprincipalamountoftheoutstandingNotestotheeffectthattheEventofDefaultorEvents ofDefaultgivingrisetoanyabovementioneddeclarationofaccelerationisorarecuredfollowinganysuch declarationandthatsuchholderswishtherelevantdeclarationtobewithdrawn,theIssuershall,givenotice thereoftotheNoteholders(withacopytotheFiscalAgent),whereupontherelevantdeclarationshallbe
11 withdrawnandshallhavenofurthereffectbutwithoutprejudicetoanyrightsorobligationswhichmayhave arisenbeforetheIssuergivessuchnotice(whetherpursuanttotheseConditionsorotherwise).Nosuch withdrawalshallaffectanyotheroranysubsequentEventofDefaultoranyrightofanyNoteholderin relationthereto.
IntheseConditions:
“Guarantee ”meansanyguaranteeoforindemnityinrespectofindebtednessorotherlikeobligation.
9. Prescription ClaimsforprincipalshallbecomevoidunlesstherelevantNotesarepresentedforpaymentwithintenyears A13.4.8 oftheappropriateRelevantDate.ClaimsforinterestshallbecomevoidunlesstherelevantCouponsare presentedforpaymentwithinfiveyearsoftheappropriateRelevantDate.
10. Replacement of Notes and Coupons IfanyNoteorCouponislost,stolen,mutilated,defacedordestroyed,itmaybereplacedattheSpecified OfficeoftheFiscalAgent,subjecttoallapplicablelawsandstockexchangerequirements,uponpaymentby theclaimantoftheexpensesincurredinconnectionwithsuchreplacementandonsuchtermsastoevidence, security,indemnityandotherwiseastheIssuermayreasonablyrequire.MutilatedordefacedNotesor Couponsmustbesurrenderedbeforereplacementswillbeissued.
11. Paying Agents InactingundertheAgencyAgreementandinconnectionwiththeNotesandtheCoupons,thePayingAgents actsolelyasagentsoftheIssueranddonotassumeanyobligationstowardsorrelationshipofagencyortrust fororwithanyoftheNoteholdersorCouponholders.
TheinitialPayingAgentsandtheirinitialSpecifiedOfficesarelistedbelow.TheIssuerreservestherightat anytimetovaryorterminatetheappointmentofanyPayingAgentandtoappointasuccessorfiscalagent andadditionalorsuccessorpayingagents; provided, however, that theIssuershallatalltimesmaintain(a) a fiscalagent,(b) apayingagentinLondon,and(c) apayingagentinanEUmemberstatethatwillnotbe obligedtowithholdordeducttaxpursuanttoanylawimplementingEuropeanCouncilDirective 2003/48/EC.
NoticeofanychangeinanyofthePayingAgentsorintheirSpecifiedOfficesshallpromptlybegiventothe Noteholders.
12. Meetings of Noteholders; Written Resolutions A13.4.7
(a) Convening Meetings of Noteholders TheFiscalAgencyAgreementcontainsprovisionsforconveningmeetingsofNoteholderstoconsider mattersrelatingtotheNotes,includingthemodificationofanyprovisionoftheseConditionsorthe provisionsoftheFiscalAgencyAgreement.SuchameetingmaybeconvenedbytheIssuerorthe FiscalAgentandshallbeconvenedbytheIssuerortheFiscalAgentatanytimeupontherequestin writingofholdersofatleast10percent.oftheaggregateprincipalamountoftheoutstandingNotes.
(b) Quorum ThequorumatanymeetingofNoteholdersconvenedtovoteonanExtraordinaryResolutionwillbe:
(i) oneormorepersonspresentandholdingorrepresentingatleast50percent.oftheaggregate principalamountoftheoutstandingNotes;or
(ii) whereameetingisadjournedandrescheduledowingtoalackofquorum,atanyrescheduled meetingofNoteholders,oneormorepersonspresentandholdingorrepresentingatleast25 per cent.oftheaggregateprincipalamountoftheoutstandingNotes;
12 provided, however ,thatanyproposalsrelatingtoaReservedMattermayonlybeapprovedbyan ExtraordinaryResolutionpassedatameetingofNoteholdersatwhichoneormorepersonspresent andholdingorrepresentingatleast75percent.oftheaggregateprincipalamountoftheoutstanding Notesformaquorum.
(c) Reserved Matters IntheseConditions,“ Reserved Matter ”means,subjectasprovidedinparagraph(d)( Matters requiring unanimity ),anyproposal:
(i) tochangethedate,orthemethodofdeterminingthedate,forpaymentofprincipal,interestor anyotheramountinrespectoftheNotes,toreduceorcanceltheamountofprincipal,interest oranyotheramountpayableonanydateinrespectoftheNotesortochangethemethodof calculatingtheamountofprincipal,interestoranyotheramountpayableinrespectofthe Notesonanydate;
(ii) tochangethecurrencyinwhichanyamountdueinrespectoftheNotesispayableortheplace inwhichanypaymentistobemade;
(iii) tochangethequorumrequiredatanymeetingofNoteholdersorthemajorityrequiredtopass anExtraordinaryResolution,WrittenResolution(asdefinedinCondition12(f))oranyother resolutionofNoteholdersorthenumberorpercentageofvotesrequiredtobecast,orthe numberorpercentageofNotesrequiredtobeheld,inconnectionwiththetakingofany decisionoractionbyoronbehalfoftheNoteholdersoranyofthem;
(iv) tochangethisdefinition,thedefinitionof“ExtraordinaryResolution”,thedefinitionof “outstanding”orthedefinitionof“WrittenResolution”;
(v) tochangeorwaivetheprovisionsoftheNotessetoutinCondition2 (Status) ;or
(vi) tochangeanyprovisionoftheNotesdescribingcircumstancesinwhichNotesmaybedeclared dueandpayablepriortotheirscheduledmaturitydate,setoutinCondition8( Events of Default ).
(d) Matters requiring unanimit y
Anyproposal: (i) tochangethelawgoverningtheNotes,thecourtstothejurisdictionofwhichtheIssuerhas submittedintheNotes,theIssuer’sobligationtomaintainanagentforserviceofprocessin EnglandortheIssuer’swaiverofimmunity,inrespectofactionsorproceedingsbroughtbyany Noteholder,setoutinCondition17( Governing Law );
(ii) tomodifyanyprovisionoftheseConditionsinconnectionwithanyexchangeorsubstitution oftheNotesfor,ortheconversionoftheNotesinto,anyotherobligationsorsecuritiesofthe Issueroranyotherperson,whichwouldresultintheConditionsassomodifiedbeingless favourabletotheholdersofNoteswhicharesubjecttotheConditionsassomodifiedthan:
(A) theprovisionsoftheotherobligationsorsecuritiesoftheIssueroranyotherperson resultingfromtherelevantexchangeorsubstitutionorconversion;or
(B) ifmorethanoneseriesofotherobligationsorsecuritiesresultsfromtherelevant exchangeorsubstitutionorconversion,theprovisionsoftheresultingserieshavingthe largestaggregateprincipalamount;or
(iii) tomodifytheprovisionsofthisparagraph(d)( Matters requiring unanimity ),
mayonlybegiveneffectwiththeconsentoftheholdersofalloftheoutstandingNotes.
13 (e) Modifications Subjectasprovidedinparagraph(d)( Matters requiring unanimity ),anymodificationofanyprovision oftheseConditionsmaybemadeifapprovedbyanExtraordinaryResolutionoraWrittenResolution. IntheseConditions,“ Extraordinary Resolution ”meansaresolutionpassedatameetingof NoteholdersdulyconvenedandheldinaccordancewiththeFiscalAgencyAgreementbyamajority ofatleast:
(i) inthecaseofaReservedMatter,75percent.oftheaggregateprincipalamountofthe outstandingNotes;or
2 (ii) inthecaseofamatterotherthanaReservedMatter,66 ⁄3 percent.oftheaggregateprincipal amountoftheoutstandingNoteswhicharerepresentedatthatmeeting.
AnyExtraordinaryResolutiondulypassedatanysuchmeetingshallbebindingonallthe Noteholders,whetherpresentornotandwhethertheyvotedinfavourornot,andallCouponholders.
(f) Written Resolutions Inaddition,theFiscalAgencyAgreementcontainsprovisionsrelatingtoWrittenResolutions.A “Written Resolution ”isaresolutioninwritingsignedbyoronbehalfoftheholdersofatleast75 percent.oftheaggregateprincipalamountoftheoutstandingNotes,inthecaseofaReservedMatter, 2 or66 /3 percent.oftheaggregateprincipalamountoftheoutstandingNotes,inthecaseofamatter otherthanaReservedMatter.AnyWrittenResolutionmaybecontainedinonedocumentorseveral documentsinthesameform,eachsignedbyoronbehalfofoneormoreNoteholders.AnyWritten ResolutionshallbebindingonalloftheNoteholders,whetherornotsignedbythem,andonall Couponholders.
(g) Manifest error, etc. TheNotes,theseConditionsandtheprovisionsoftheFiscalAgencyAgreementmaybeamended withouttheconsentoftheNoteholdersortheCouponholderstocorrectamanifesterror.Inaddition, thepartiestotheFiscalAgencyAgreementmayagreetomodifyanyprovisionthereof,buttheIssuer shallnotagree,withouttheconsentoftheNoteholders,toanysuchmodificationunlessitisofa formal,minorortechnicalnatureoritisnotmateriallyprejudicialtotheinterestsoftheNoteholders.
(h) Notes controlled by the Issuer Forthepurposesof(i)ascertainingtherighttoattendandvoteatanymeetingofNoteholdersorthe righttosign,orauthorisethesignatureof,anyWrittenResolution,(ii)thisCondition12( Meetings of Noteholders; Written Resolutions )andSchedule5( Meetings of Noteholders )totheFiscalAgency Agreement,(iii)Condition13( Noteholders’ Committee )and(iv)Condition8( Events of Default ), thoseNotes(ifany)whichareheldincircumstanceswheretheIssuerhasthepowertodirectthe castingofvotesinrespectofsuchNotes,whetherdirectlyorindirectly,shall(unlessanduntilceasing tobesoheld)bedisregardedandbedeemednottoremainoutstanding.Withoutprejudicetothe generalityoftheprevioussentence,theIssuershallbedeemedtohavethepowertodirectthecasting ofvotesinrespectofaNoteiftheNoteisheldbyoronbehalfoftheIssuerorbyoronbehalfofany personwhichisownedorcontrolleddirectlyorindirectlybytheIssuerorbyanypublicsector instrumentalityoftheIssuer,where:
(i) “public sector instrumentality ”meansTheBankofAlbania,theMinistryofFinanceofthe RepublicofAlbaniaandanyotherdepartment,ministryoragencyofthegovernmentofthe RepublicofAlbaniaoranycorporation,trust,financialinstitutionorotherentityownedor controlledbythegovernmentoftheRepublicofAlbania;and
(ii) “control ”meansthepower,directlyorindirectly,throughtheownershipofvotingsecuritiesor otherownershipinterestsorotherwise,todirectthemanagementoforelectorappointa majorityoftheboardofdirectorsorotherpersonsperformingsimilarfunctionsinlieuof,or inadditionto,theboardofdirectorsofacorporation,trust,financialinstitutionorotherentity.
14 In advance of any meeting of Noteholders or Written Resolution the Issuer shall provide to the Fiscal Agent a certificate of the Issuer setting out the total number of Notes which are held in circumstances where the Issuer has at the date of such certificate the power to direct the casting of votes in respect of such Notes. The Fiscal Agent shall make any such certificate available for inspection during normal business hours at its Specified Office and, upon reasonable request, will allow copies of such certificate to be taken.
13. Noteholders’ Committee
(a) Appointment The Noteholders may, by a resolution passed at a meeting of Noteholders duly convened and held in accordance with the Fiscal Agency Agreement by a majority of at least 50 per cent. in aggregate principal amount of the Notes then outstanding, or by notice in writing to the Issuer (with a copy to the Fiscal Agent) signed by or on behalf of the holders of at least 50 per cent. in aggregate principal amount of the Notes then outstanding, appoint any person or persons as a committee to represent the interests of the Noteholders if any of the following events has occurred:
(i) an Event of Default;
(ii) any event or circumstance which could, with the giving of notice, lapse of time, the issuing of a certificate and/or fulfilment of any other requirement provided for in Condition 8 (Events of Default) become an Event of Default; or
(iii) any public announcement by the Issuer to the effect that the Issuer is seeking or intends to seek a restructuring of the Notes (whether by amendment, exchange offer or otherwise),
provided, however, that no such appointment shall be effective if the holders of more than 25 per cent. of the aggregate principal amount of the outstanding Notes have either (A) objected to such appointment by notice in writing to the Issuer (with a copy to the Fiscal Agent) during a specified period following notice of the appointment being given (if such notice of appointment is made by notice in writing to the Issuer) where such specified period shall be either 30 days or such other longer or shorter period as the committee may, acting in good faith, determine to be appropriate in the circumstances, or (B) voted against such resolution at a meeting of Noteholders duly convened and held in accordance with the Fiscal Agency Agreement. Such committee shall, if appointed by notice in writing to the Issuer, give notice of its appointment to all Noteholders in accordance with Condition 15 (Notices) as soon as practicable after the notice is delivered to the Issuer.
(b) Powers Such committee in its discretion may, among other things, (i) engage legal advisers and financial advisers to assist it in representing the interests of the Noteholders, (ii) adopt such rules as it considers appropriate regarding its proceedings, (iii) enter into discussions with the Issuer and/or other creditors of the Issuer, (iv) designate one or more members of the committee to act as the main point(s) of contact with the Issuer and provide all relevant contact details to the Issuer, (v) determine whether or not there is an actual or potential conflict of interest between the interests of the holders of the Notes then outstanding and the interests of the holders of debt securities of any one or more other series issued by the Issuer and (vi) upon making a determination of the absence of any actual or potential conflict of interest between the interests of the holders of the Notes then outstanding and the interests of the holders of debt securities of any one or more other series issued by the Issuer, agree to transact business at a combined meeting of the committee and such other person or persons as may have been duly appointed as representatives of the holders of securities of each such other series. Except to the extent provided in this paragraph (b) (Powers), such committee shall not have the ability to exercise any powers or discretions which the Noteholders could themselves exercise. The Issuer shall pay any fees and expenses which are reasonably incurred by any such committee or any such combined committee (including, without limitation, the costs of giving notices to Noteholders, fees and
15 expenses of the committee’s legal advisers and financial advisers, if any) within 30 days of the delivery to the Issuer of a reasonably detailed invoice and supporting documentation.
14. Further Issues The Issuer may from time to time, without the consent of the Noteholders or the Couponholders, create and issue further notes having the same terms and conditions as the Notes in all respects (or in all respects except for the first payment of interest) so as to form a single series with the Notes.
15. Notices Notices to the Noteholders shall be valid if published in a leading English language daily newspaper published in London (which is expected to be the Financial Times). Any such notice shall be deemed to have been given on the date of first publication. Couponholders shall be deemed for all purposes to have notice of the contents of any notice given to the Noteholders.
All notices to the Issuer will be valid if sent to the Republic of Albania at the Ministry of Finance of the Republic of Albania, Tirana, or such other address as may be notified by the Issuer to the Noteholders in accordance with the above paragraph.
16. Currency Indemnity If any sum due from the Issuer in respect of the Notes or the Coupons or any order or judgment given or made in relation thereto has to be converted from the currency (the “first currency”) in which the same is payable under these Conditions or such order or judgment into another currency (the “second currency”) for the purpose of (a) making or filing a claim or proof against the Issuer, (b) obtaining an order or judgment in any court or other tribunal or (c) enforcing any order or judgment given or made in relation to the Notes, the Issuer shall indemnify each Noteholder, on the written demand of such Noteholder addressed to the Issuer and delivered to the Issuer or to the Specified Office of the Fiscal Agent, against any loss suffered as a result of any discrepancy between (i) the rate of exchange used for such purpose to convert the sum in question from the first currency into the second currency and (ii) the rate or rates of exchange at which such Noteholder may in the ordinary course of business purchase the first currency with the second currency upon receipt of a sum paid to it in satisfaction, in whole or in part, of any such order, judgment, claim or proof.
This indemnity constitutes a separate and independent obligation of the Issuer and shall give rise to a separate and independent cause of action.
17. Governing Law A13.4.3 The Notes and any non-contractual obligations arising out of or in connection with the Notes are governed by English law.
18. Arbitration
(a) Arbitration Subject to Condition 18(e) (Noteholders’ Option), any dispute (a “Dispute”) arising out of or in connection with the Notes (including any non-contractual obligation arising out of or in connection with the Notes) shall be referred to arbitration under the Arbitration Rules of the London Court of International Arbitration (LCIA), which rules are deemed to be incorporated by reference into this Condition.
(b) Formation of arbitral tribunal, seat and language of arbitration (i) Formation of arbitration tribunal: The arbitral tribunal shall consist of three arbitrators, each of whom shall be disinterested in the dispute or controversy, shall have no connection with any party thereto and shall be an attorney experienced in international securities transactions. The Issuer and the Noteholders shall each nominate an arbitrator, who, together shall nominate the
16 ChairmanoftheTribunal.Ifsuchappointmentshallnothaveoccurredwithinthirty(30) calendardaysaftertheinitiatingpartyservesthearbitrationdemandorifaChairmanhasnot beenselectedwithinthirty(30)calendardaysoftheselectionofthesecondarbitrator,the ArbitrationCourtoftheLondonCourtofInternationalArbitrationshallappointthethree arbitratorsortheChairman,asthecasemaybe.ThepartiesandtheArbitrationCourtmay appointarbitratorsfromamongthenationalsofanycountry,whetherornotapartyisanational ofthatcountry.Thearbitratorsshallhavenoauthoritytoawardpunitiveorotherpunitivetype damagesandmaynot,inanyevent,makeanyruling,findingorawardthatdoesnotconform tothetermsandconditionsofthisAgreement.
(ii) Seat of arbitration: TheseatofarbitrationshallbeLondon,Englandandallhearingsshallbe inLondon,England.
(iii) Language of arbitration: ThelanguageofthearbitrationshallbeEnglish.
(c) Fees Feesofthearbitration(excludingeachparty’spreparation,travel,attorneys’feesandsimilarcosts) shallbeborneinaccordancewiththedecisionofthearbitrators.Thedecisionofthearbitratorsshall befinal,bindingandenforceableuponthepartiesandjudgmentuponanyawardrenderedbythe arbitratorsmaybeenteredinanycourthavingjurisdictionthereof.
(d) Recourse to Courts ForthepurposesofarbitrationpursuanttothisCondition18 (Arbitration ),theIssuerandtherelevant NoteholderexcludethejurisdictionoftheCourtsunderSections45and69oftheArbitrationAct 1996.
(e) Noteholders’ Option AtanytimebeforeaNoteholderhasnominatedanarbitratortoresolveanyDispute(s)pursuantto Condition18(a)( Arbitration ),anyNoteholder,atitssoleoption,mayelectbynoticeinwritingtothe IssuerthatsuchDispute(s)shallinsteadbeheardbythecourtsofEnglandorbyanyothercourtof competentjurisdiction,asmoreparticularlydescribedinCondition19(c)( Rights of the Noteholder to take proceedings outside England ).Followinganysuchelection,noarbitraltribunalshallhave jurisdictioninrespectofanyDispute(s).
19. English Courts IntheeventthatanyNoteholderissuesanoticepursuanttoCondition18(e) (Noteholders’ Option ),the followingprovisionsinthisCondition19 (English Courts ) shallapply:
(a) Jurisdiction ThecourtsofEnglandhaveexclusivejurisdictiontosettleanyDispute(s)arisingoutoforin connectionwiththeNotes(includinganynon-contractualobligationarisingoutoforinconnection withtheNotes).
(b) Appropriate forum TheIssueragreesthatthecourtsofEnglandarethemostappropriateandconvenientcourtstosettle anyDispute(s)and,accordingly,thatitwillnotarguetothecontrary.
(c) Rights of the Noteholders to take proceedings outside England Condition19( English Courts )isforthebenefitoftheNoteholdersonly . Asaresult,nothing in Conditions17( Governing law ), 18( Arbitration )or19( English Courts )preventsanyNoteholderfrom takingproceedingsrelatingtoaDispute(“ Proceedings ”)inanyothercourtswithjurisdiction.Tothe extentallowedbylaw,NoteholdersmaytakeconcurrentProceedingsinanynumberofjurisdictions.
17 (d) Process agent TheIssueragreesthatthedocumentswhichstartanyProceedingsandanyotherdocumentsrequired tobeservedinrelationtothoseProceedingsmaybeservedonitbybeingdeliveredtotheIssuerat LawDebentureCorporateServicesLimitedat5thFloor,100WoodStreet,LondonEC2V7EX, England. Ifforanyreasonsuchpersonisnotorceasestobeeffectivelyappointedtoacceptservice ofprocessonbehalfoftheIssuer,theIssuershallappointafurtherpersoninEnglandtoacceptservice ofprocessonitsbehalfandshalldelivertotheSpecifiedOfficeoftheFiscalAgentacopyofthenew agent’sacceptanceofthatappointmentwithin30days.Nothinginthisparagraphshalllimittheright ofanyNoteholdertoserveprocessagainsttheIssuerinanyothermannerpermittedbylaw.
(e) Consent to enforcement etc. SubjecttothelimitationexpressedinCondition19(f)( Waiver of immunity ),theIssuerconsents generallyinrespectofanyProceedingstothegivingofanyreliefortheissueofanyprocessin connectionwithsuchProceedingsincluding(withoutlimitation)themaking,enforcementor executionagainstanypropertywhatsoever(irrespectiveofitsuseorintendeduse)ofanyorderor judgmentwhichismadeorgiveninsuchProceedings.
(f) Waiver of immunity TotheextentthattheIssuermayinanyjurisdictionbeentitledtoclaimforitselforitsassetsor A16.6.2 revenuesimmunityfromsuit,execution,attachment(whetherinaidofexecution,beforejudgmentor otherwise)orotherlegalprocessandtotheextentthatsuchimmunity(whetherornotclaimed)may beattributedinanysuchjurisdictiontotheIssueroritsassetsorrevenues,theIssueragreesnotto claimandirrevocablywaivessuchimmunitytothefullextentpermittedbythelawsofsuch jurisdiction,provided,however,thattheIssuerdoesnotwaiveanyimmunityinrespectof:(i)present orfuture“premisesofthemission”asdefinedinViennaConventiononDiplomaticRelationssigned in1961,presentorfuture“consularpremises”asdefinedinViennaConventiononConsularRelations signedin1963orotherwiseusedbyadiplomatordiplomaticmissionofAlbaniaoranyagencyor instrumentalitythereof;or(ii)anyimmovablepropertywhichfallsunderprovisionsofparagraph1to 3ofarticle3ofAlbanianLawno.8743,dated22February2001“Onthestateimmovableproperties”.
There will appear at the foot of the Conditions endorsed on each Note in definitive form the names and Specified Offices of the Paying Agents as set out at the end of this Prospectus.
18 SUMMARY OF PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM
The Notes will initially be in the form of the Temporary Global Note which will be deposited on or around A13.4.14 the Closing Date with a common depositary for Euroclear and Clearstream, Luxembourg. A13.4.2
The Temporary Global Note will be exchangeable in whole or in part for interests in the Permanent Global Note not earlier than 40 days after the Closing Date upon certification as to non-U.S. beneficial ownership. No payments will be made under the Temporary Global Note unless exchange for interests in the Permanent Global Note is improperly withheld or refused. In addition, interest payments in respect of the Notes cannot be collected without such certification of non-U.S. beneficial ownership.
The Permanent Global Note will become exchangeable in whole, but not in part, for Notes in definitive form A13.4.7 (“ Definitive Notes ”) in the denomination of €50,000 each at the request of the bearer of the Permanent A13.4.5 Global Note if (a) Euroclear or Clearstream, Luxembourg is closed for business for a continuous period of 14 days (other than by reason of legal holidays) or announces an intention permanently to cease business or (b) any of the circumstances described in Condition 8 ( Events of Default ) occurs.
So long as the Notes are represented by a Temporary Global Note or a Permanent Global Note and the relevant clearing system(s) so permit, the Notes will be tradeable only in the minimum authorised denomination of €50,000 and higher integral multiples of €1,000, notwithstanding that no Definitive Notes will be issued with a denomination above €99,000.
Whenever the Permanent Global Note is to be exchanged for Definitive Notes, the Issuer shall procure the prompt delivery (free of charge to the bearer) of such Definitive Notes, duly authenticated and with Coupons attached, in an aggregate principal amount equal to the principal amount of the Permanent Global Note to the bearer of the Permanent Global Note against the surrender of the Permanent Global Note to or to the order of the Fiscal Agent within 30 days of the bearer requesting such exchange.
If:
(a) Definitive Notes have not been delivered by 5.00 p.m. (London time) on the thirtieth day after the bearer has duly requested exchange of the Permanent Global Note for Definitive Notes; or
(b) the Permanent Global Note (or any part of it) has become due and payable in accordance with the Conditions or the date for final redemption of the Notes has occurred and, in either case, payment in full of the amount of principal falling due with all accrued interest thereon has not been made to the bearer in accordance with the terms of the Permanent Global Note on the due date for payment, then the Permanent Global Note (including the obligation to deliver Definitive Notes) will become void at 5.00 p.m. (London time) on such thirtieth day (in the case of (a) above) or at 5.00 p.m. (London time) on such due date (in the case of (b) above) and the bearer of the Permanent Global Note will have no further rights thereunder (but without prejudice to the rights which the bearer of the Permanent Global Note or others may have under a deed of covenant dated 4 Novembe r 2010 (the “ Deed of Covenant ”) executed by the Issuer). Under the Deed of Covenant, persons shown in the records of Euroclear and/or Clearstream, Luxembourg as being entitled to an interest in the Permanent Global Note will acquire directly against the Issuer all those rights to which they would have been entitled if, immediately before the Permanent Global Note became void, they had been the holders of Definitive Notes in an aggregate principal amount equal to the principal amount of Notes they were shown as holding in the records of Euroclear and/or (as the case may be) Clearstream, Luxembourg.
In addition, the Temporary Global Note and the Permanent Global Note will contain provisions which modify the Terms and Conditions of the Notes as they apply to the Temporary Global Note and the Permanent Global Note. The following is a summary of certain of those provisions:
19 Payments: All payments in respect of the Temporary Global Note and the Permanent Global Note will be A13.4.7 made against presentation and (in the case of payment of principal in full with all interest accrued thereon) A13.4.9 surrender of the Temporary Global Note or (as the case may be) the Permanent Global Note to or to the order of any Paying Agent and will be effective to satisfy and discharge the corresponding liabilities of the Issuer in respect of the Notes. On each occasion on which a payment of principal or interest is made in respect of the Temporary Global Note or (as the case may be) the Permanent Global Note, the Issuer shall procure that the payment is noted in a schedule thereto.
Notices: Notwithstanding Condition 15 ( Notices ), while all the Notes are represented by the Permanent Global Note (or by the Permanent Global Note and/or the Temporary Global Note) and the Permanent Global Note is (or the Permanent Global Note and/or the Temporary Global Note are) deposited with a common depositary for Euroclear and Clearstream, Luxembourg, notices to Noteholders may be given by delivery of the relevant notice to Euroclear and Clearstream, Luxembourg and, in any case, such notices shall be deemed to have been given to the Noteholders in accordance with Condition 15 ( Notices ) on the date of delivery to Euroclear and Clearstream, Luxembourg.
20 USE OF PROCEEDS
The net proceeds from the issue of the Notes are expected to be approximately €297,858,00 0, after A13.6.1 commissions and certain expenses payable by the Issuer. The net proceeds of the issue of the Notes will be used to repay in full the €192.6 million syndicated loan obtained by Albania in 2009 (see “ Public Debt – Debt Service ”) and for general budgetary purposes . Total expenses payable by the Issuer in connection with the issue of the Notes are expected to be approximately €120,000.
21 THE REPUBLIC OF ALBANIA
Area and Population A16.3.1 Albania is located in the southwestern region of the Balkan Peninsula in southeastern Europe. Albania shares A16.3.2 a border with Greece to the south/southeast, Macedonia to the east, Kosovo to the northeast, and Montenegro to the northwest. Western Albania lies along the Adriatic and Ionian Sea coastlines. The Adriatic Sea separates Albania from Italy via the Strait of Otranto. Albania covers an area of approximately 28,748 square kilometres. It is predominantly mountainous but is relatively flat along its coastline with the Adriatic Sea. Albania’s primary seaport is Durres, through which 90 per cent. of Albania’s maritime cargo is transported. The capital city of Albania is Tirana, which is located in the central area of the country. Chromium, ferro- nickel, copper, coal, oil and gas are among the most important sub-soil minerals in Albania.
As at 31 December 2009, the population of Albania was approximately 3.2 million, of which approximately 49 per cent. lived in urban areas (including approximately 17 per cent. of the population resident in Tirana). As at December 2009, the ethnic composition of the population was predominantly ethnic Albanian (estimated to comprise 95 per cent. of the population) with Greeks making up the next largest group. Albanian is the official language. The predominant religions are Muslim (Sunni and Bektashi), Albanian Orthodox and Roman Catholic.
History Albanians are descended from a non-Slavic, non-Turkish group of tribes known as Illyrians, who arrived in the Balkans around 2000 BC. After falling under Roman authority in 165 BC, Albania was controlled nearly continuously by a succession of foreign powers until the mid-20th century, with only brief periods of self- rule.
Following the split of the Roman Empire in 395, the Byzantine Empire established control over present-day Albania. In the 11th century, Byzantine Emperor Alexius I Comnenus made the first recorded reference to a distinct area of land known as Albania and to its people.
The Ottoman Empire ruled Albania from 1385 to 1912. During this time, much of the population converted to the Islamic faith, and Albanians also emigrated to Italy, Greece, Egypt and Turkey. Although its control was briefly disrupted during the 1443-1478 revolt, led by Albania’s national hero, Gjergj Kastrioti Skenderbeu, the Ottomans eventually reasserted their dominance.
Albania declared its independence from the Ottoman Empire in 1912 but was conquered by Italy in 1939. Communist partisans took over the country in 1944. Albania was ruled by Enver Hoxha in a totalitarian Communist regime from the end of World War II until his death in 1985. During the period of Hoxha’s rule, Albania allied itself first with the Soviet Union (until 1960), and then with China (until 1978). The Communist regime applied a principle of self-reliance and isolationism, including prohibiting foreign loans and investment.
In the early 199 0s, Albania ended 46 years of isolationist Communist rule and established a multi-party democracy. The new government introduced some liberalisation, including granting the freedom to travel abroad in 1990, and made efforts to improve ties with the outside world. The former Communists remained in power as a result of the elections of March 1991, but a general strike and urban opposition led to the formation of a coalition cabinet that included non-Communists.
In elections in March 1992, Sali Berisha, leader of the Democratic Party of Albania (“ DPA ”) was elected as the first non-Communist president since World War II. The defeat of the Communists caused economic collapse and social unrest. The newly elected Government introduced reforms which began Albania’s transition to a market economy. In 1996 and 1997, Albania experienced the rise and collapse of several large financial pyramid schemes, which led to riots throughout the country, and a United Nations military mission led by Italy was sent to stabilise the country. The government and Mr Berisha resigned, and in the parliamentary election that followed in the summer of 1997 the DPA and Mr Berisha were defeated. The
22 Albanian Socialist Party (the “ SPA ”) ruled for eight years until the DPA returned to power in the elections of July 2005 and Mr Berisha was appointed as Prime Minister.
Albania became a member of the North Atlantic Treaty Organization (“ NATO ”) in April 2009.
Constitution, Government and Political Parties A16.3.5
Political System Albania is a parliamentary republic based on the separation and balancing of legislative, executive and judicial powers. The Constitution is the highest law in the Republic of Albania.
Legislative power is concentrated in the unicameral Albanian parliament, called the Kuvendi (also known as the Assembly). The Kuvendi consists of 140 members, all of whom serve four-year terms. Prior to April 2008, 100 members had been elected directly in single member constituencies, and the remaining 40 were selected in a proportional system on the basis of multi-name lists of parties or party coalitions according to their respective order. Since April 2008, all 140 members are now elected on the basis of a regional proportional system with zones corresponding to 12 administrative regions, each of which is a “Qark”. Although most legislation is passed by a simple majority of the Kuvendi, legislation to amend the Constitution and with respect to certain fundamental matters requires a three-fifths majority.
The President is the Head of State and represents the unity of the people. He has general powers as Commander-in-Chief of the army and Chair of the National Security Council. He is also the head of the High Council of Justice. Among the President’s duties are addressing the Kuvendi, granting pardons and citizenships, giving military decorations and titles of honour and appointing and withdrawing diplomatic representatives of Albania to other states and international organisations. Although the position is largely ceremonial, the Constitution gives the President authority to appoint and dismiss certain high-ranking civil servants in the executive and judicial branches (including, with the consent of the Kuvendi, the judges of the Supreme Court), and this authority can have political implications. The President is elected by a majority vote of the Kuvendi. The President is in every case elected for five years, with a right of re-election to one further fiv e-year term.
The executive branch of government is made up by the Council of Ministers, headed by the Prime Minister. The Council of Ministers consists of the Prime Minister, Deputy Prime Minister, and ministers (presently 15 ministers and 35 deputy ministers). The Council of Ministers exercises every state function that is not given to other organs of state power or to local government and defines the principal directions of the general state policy. The Prime Minister is appointed by the President and approved by a simple majority of all members of the Kuvendi. Members of the Council of Ministers are nominated by the Prime Minister, decreed by the President, and approved by the Kuvendi.
Albania’s civil law system is similar to that of other European countries. The court structure consists of a Constitutional Court, a Supreme Court, and multiple appeal and district courts. The Constitutional Court is comprised of nine members each appointed by the Kuvendi for one nine-year term. The Constitutional Court interprets the Constitution, determines the constitutionality of laws and resolves disagreements between local and federal authorities. The Supreme Court is the highest court of appeal and consists of 11 members appointed by the President with the consent of the Kuvendi for nine-year terms. The President chairs the High Council of Justice, which is responsible for appointing and dismissing other judges. The High Council of Justice is comprised of 15 members: the President, the Chairman of the High Court, the Minister of Justice, three members elected by the Kuvendi, and nine judges of all levels elected by the National Judicial Conference. The remaining courts are divided into three jurisdictions: criminal, civil, and military. There are no jury trials under the Albanian justice system. Judgements are rendered by judges.
Current Government The main political parties in Albania are the DPA; the SPA; the Socialist Movement for Integration (the “SMI ”); the Albanian Republican Party; the Justice and Integration Party; the Demo-Christian Party; the Union for Human Rights Party; the New Democracy Party; the Social Democratic Party; and the Social Democracy Party.
23 Elections for the Kuvendi were held in June 2009, in which the “Alliance for Change” coalition led by Mr Berisha’s DPA won 70 of the 140 seats (the DPA won 68 of the 70 “Alliance for Change” coalition seats) , marking the first time since the restoration of multiparty elections in 1991 that a winning party or alliance has failed to secure a clear majority. The “Alliance for Change” Coalition formed a coalition government with the SMI , together called the “Governance for European Integration” Coalition, to reach a total of 74 seats in order to be able to govern. The number of seats in the coalition government has subsequently increased to 75 after another member became aligned with the Coalition . The next general election of the Kuvendi is scheduled to be held in 2013.
Bamir Topi was elected President by the Kuvendi in July 2007 and his term will expire in July 2012.
The following table shows each party’s number of seats in the Kuvendi following the June 2009 general election:
Number of seats ––––––––––––––––– Democratic Party (DPA) ...... 68 Socialist Party (SPA) ...... 65 Socialist Movement for Integration (SMI )...... 4 Union for Human Rights Party ...... 1 Republican Party ...... 1 Justice and Integration Party ...... 1 –––––––– Total ...... ––––––1–4–0 A prolonged political crisis has followed the Kuvendi elections in June 2009. Following the election, the SPA alleged voting irregularities in the election and boycotted the Kuvendi beginning in September 2009 . The SPA held a series of protests, where opposition supporters gathered in different cities in November 2009 to demand a recount of the votes in the election. The DPA responded to the SPA’s protests by holding a mass rally to demonstrate its own public support, with an event on 8 December 2009 to celebrate the 19th anniversary of the first student protests that led to the collapse of Communist rule and to the multi-party elections of 1991. Further protests by the SPA were held during May 2010.
In January 2010 , the Parliamentary Assembly of the Council of Europe (the “ PACE ”), adopted a resolution which urged the parties to the dispute to start a dialogue. The PACE also called on the Government to establish, without delay, a parliamentary commission to investigate the allegations of voting irregularities in the election and urged the opposition to end its boycott of the Kuvendi. The initial talks ended without either side making any concessions. The Prime Minister, Sali Berisha, and the leader of the opposition SP A, Edi Rama, held talks on 13 February 2010 in an unsuccessful attempt to find a solution to the political crisis . The boycott of the Kuvendi by the SPA lasted from September 2009 to May 201 0 (although the SPA did return for one session in February 2010) , during which period the SPA did not participate in the Kuvend i, although the Kuvend i continue d to pass legislation .The SPA is currently participating fully in the sessions of the Kuvendi.
The Kuvendi has decided to for m a parliamentary commission to investigate the SPA’s allegations of voting irregularities although the commission has not yet been established .
Notwithstanding their differences, t he DPA and the SPA have expressed similar positions with respect to supporting reforms and joining the EU.
International Relations Albania is a member of a number of international organisations, as well as multiple regional organisations and initiatives, including NATO, the Organization for Security and Cooperation in Europ e, the United Nations , the Stability Pact, the Adriatic Charter, and the World Trade Organizatio n.
EU integration, leading to eventual membership, is the Government’s overriding foreign policy priority. In June 2006, Albania and the EU signed a Stabilisation and Association Agreement, which provides guidance on political and economic reform and is the first step to EU membership. In accordance with the Stabilisation
24 and Association Agreement, Albania will focus on implementing essential rule of law reforms and addressing corruption and organised crime. Albania filed its application for EU membership in April 2009. I n April 2010 , Albania submitted a completed questionnaire to the European Commission that will form the basis of the Commission’s assessment of Albania’s readiness to become a candidate for EU membership.
An important short-term objective of the Government is to achieve visa liberalisation with the Schengen countries. In 2006, Albania entered into a Readmission Agreement with the Schengen countries and in 2008 Albania entered into a Visa Facilitation Agreement with those countries. As a result of these two agreements, it is now easier for certain categories of Albanian citizens to travel to Schengen countries for various activities. In March 2008, dialogue with the EU on visa liberalisation began and on 29 September 2010, the European Commissioner for Civil Liberties, Justice and Home Affairs in the European Parliament adopted a resolution for visa liberalisation for Albania with 49 votes in favour and two abstentions . On 7 October 2010, the European Parliament approved the proposal to waive visa requirements for Albanian nationals . A final decision o n visa liberalisation by the Interior Ministry of the European Union is expected to occur before the end of 2010 .
Albania has benefited from EU support through a number of programmes, targeted both nationally and regionally. Supported projects are in the areas of governance and institution building, rule of law, civil society, education, employment, European standards, regional development, transport, environment, agriculture, rural development, SMEs, statistics, state aid, consumer protection and taxation. From 1991 to 2008, Albania received an aggregate of approximately €1,384.5 million in EU grants and concessional loans (i.e., loans at below market terms with the aim of acheiving a certain objective) through various programmes.
Albania maintains good relations with its neighbours. It has recognised the independence of, and strengthened its relationship with, Kosovo, and it maintains good relations with Montenegro, which gained its independence after the dissolution of the Serbia and Montenegro union in 2006. Albania has recently revitalised its relationship with Serbia following the visit in March 2010 of Albania’s Deputy Prime Minister and its Minister of Foreign Affairs to Belgrade. Tensions occasionally arise with Greece over the treatment of the Greek minority in Albania or the Albanian community in Greece, but overall relations with Greece are good.
Albanian, Macedonian, and Italian law enforcement agencies are cooperating with increasing efficiency to crack down on the trafficking of arms, drugs, contraban d and human beings across their borders. Albania has also arrested and prosecuted several ethnic Albanian extremists on charges of inciting interethnic hatred in Macedonia and Kosovo.
Albania participates in a number of regional political and economic forums and initiatives, including transition from the Stability Pact to a more regionally owned framework with the South-East European Cooperation Process and the Regional Cooperation Counci l. Albania held the Black Sea Economic Cooperation chairmanship from May to October 2008.
Albania is expected to increase its participation in NATO as part of its closer integration with the alliance, which it joined in April 2009. As the first step in increasing its role in peacekeeping and security operations with NATO, in July 201 0, Albania increased its troop deployment in Afghanistan, from approximately 25 0 soldiers to approximately 290 soldiers, and is contemplating a further increase in troop levels .
25 THE ALBANIAN ECONOMY
Background A16.3.4 The Albanian economy has undergone a radical transformation since the defeat of the Communist government in 1992. In common with other post -Communist countries in Eastern Europe, Albania’s transition to a market-based economy in the 1990s was accompanied by economic dislocation due to the shock of the transition and the effect of implementing economic reform.
The democratically elected government that assumed office in April 1992 launched an ambitious economic reform programme that was intended to stop economic deterioration and begin Albania’s transition toward s a market economy. Key elements included price and exchange system liberalisation, fiscal consolidation and monetary restraint. These were complemented by a comprehensive package of structural reforms, including privatisation, enterprise and financial sector reform, and the creation of a legal framework for a market economy and private sector activity. Led by the agricultural sector, real GDP grew and Albania’s currency, the lek, stabilised. Progress stalled in 199 5, and the collapse of the large financial pyramid schemes in 1996 and 199 7, and t he instability that followed , were a significant setbac k.
In recent years, the Albanian economy has improved, infrastructure has developed and substantial reforms in areas such as tax collection, property laws, and business regulations are continuing to take place. Between 1998 and 20 08, Albania had real GDP growth of at least 5 per cent. in each year except 2002. From 2005 to 2008, Albania had an average annual GDP growth rate of 6 .2 per cent. However, Albania is still one of the poorest countries in Europe. According to the National Statistical Office (“ INSTAT ”), annual per-capita GDP was estimated to be ALL 343,000 (€2,797 ) in 2008 and is estimated to have been ALL 360,000 (€2,723) in 2009, while gross national income (“ GNI ”) per capita was estimated to be approximately ALL 342,000 (€2,785) in 2008 and ALL 359,000 (€2,733) in 2009 . According to preliminary data by the World Bank’s Poverty Assessment Program me , 12.4 per cent. of the Albanian population lived below the poverty line in 2008, reflecting a significant improvement from 25.4 per cent. in 2002. The official unemployment rate was 13.8 per cent. as at December 2009, as compared with 13.0 per cent. as at December 2008 and 13.5 per cent. as at December 2007.
Approximately 50 per cent. of all workers in Albania are employed in the agricultural sector, although the construction and service industries have been expanding recently. Tourism has benefi ted from visits by tourists from the Balkan region. Albania’s GDP in 2009 primarily consisted of services ( 52 per cent., of which trade, hotels and restaurants amounted to 19.4 per cent. and transport amounted to 5 per cent.), agriculture (16 .6 per cent.), construction (12 .7 per cent.) and industry (8.4 per cent.) based on Ministry of Finance estimates as of June 2010 . Albania’s GDP in 2008 primarily consisted of services (50.7 per cent., of which trade, hotels and restaurants amounted to 18.9 per cent. and transport 4.8 per cent.), agriculture (16.6 per cent.), construction (13 .3 per cent.) and industry (8.8 per cent.) according to INSTAT semifinal data .
Economic reform has been hampered by Albania’s large informal economy, which INSTAT estimated to be 28.5 per cent. of GDP in 2007 and 27.2 per cent. in 2008.
Effects of the Global Financial Crisis A16.3.3 The global financial crisis has had less effect on Albani a than on many other countries i n the region . Albania’s low level of integration with the global financial markets and its recent structural, fiscal and economic reforms have helped protect it against the direct effects of the financial crisis (see “Public Debt – Debt Management Policy,” “Monetary and Financial Policy” and “Public Finances – Expenditure.” ). Real GDP increased by 7.7 per cent. in 2008 and is estimated to have increased by approximately 3 .3 per cent. in 2009, driven by public infrastructure investments and activity in the service s sectors. In the first quarter of 2010, GDP is estimated to have increased 2.0 per cent. compared to the fourth quarter of 2009 and is estimated to have increased 2.0 per cent. as compared to the first quarter of 2009. In the second quarter of 2010, GDP is estimated to have increased 2.4 per cent. compared to the first quarter of 2010 and is estimated to have increased 3.3 per cent. as compared to the second quarter of 2009 . The 2009 budget deficit increased to 7.1 per cent., (4 .9 per cent. of GDP if the expenditure undertaken only upon receipt of privatisation
26 receipts is exclude d) as compared to 5.5 per cent. in 2008 and 3.5 per cent. in 2007. See “ Public Finances— Budget Deficits ”. Revenue administration and public debt management have been strengthened, leading to increa sed overall tax revenues in 2008 as compared to 2007 despite a reduction of the corporate profit tax rate and personal income tax rat e to 10 per cent. in 2008 from the previous rates of 20 per cent. and 23 per cent., respectively. Budget r evenues in 2009 increased by 2.7 per cent. compared to 2008. Budget r evenues in 2009 were negatively affected by lower than expected economic growth, decreased nominal imports and lower import prices than in 2008.
The most significant impact of the financial crisis was felt in the real economy due to lower remittances from Albanians working abroad , which decreased by 6.2 per cent. in 2009 compared to 200 8(but increased by 0.8 per cent. in lek terms due to lek depreciations against the euro) and lower exports which decreased by 18.2 per cent. in 2009 compared to 200 8 (or decreased by 12 per cent. in lek term s), while imports decreased by 8.8 per cent. in 2009 as compared to 2008 (or decreased by 1.9 per cent. in lek term s). As a result, the current account deficit remained high at approximately 15 .5 per cent. of GDP at the end of 2009. In response to decreasing foreign currency inflows and tighter lending conditions, the Bank of Albania lowered its policy interest rate from 6.25 per cent. to 5.75 per cent. in January 2009, to 5.25 per cent. in October 2009 and to 5 per cent. in July 2010 . Inflation has remained within the Bank of Albania’s +/-1 per cent. tolerance of the 3 per cent. target, and continued its downward trend in 2009, reaching an average of 2.2 per cent. year on year for 2009 as compared to 2008. Foreign reserve assets have remained broadly stable at approximately four months of imports of goods and services .
Gross Domestic Product A16.3.4(b) The following table sets out information on Albania’s GDP for the years indicated both as a total and per capita:
2005 2006 2007 2008 2009 (1) –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– GDP at current prices (AL L millions) ...... 814,797 882,209 967,670 1,088,132 1,145,340 GDP ( € billions) ...... 6.56 7.17 7. 83 8.86 8.67 Real GDP growth (%) ...... 5.8 5.4 5.9 7.7 3.3 GDP per capita (AL L thousands) 260 280 306 343 360 GDP per capita (€) ...... 2, 093 2,2 76 2, 475 2, 797 2,723
Note: (1) Estimated data. Source: INSTA T
In 2001, 2002, 2003 and 2004 Albania’s real GDP grew by 7.0 per cent., 4.2 per cent., 5.8 per cent. and 5.7 per cent., respectively. Between 2005 and 2008, Albania’s GDP grew in real terms by an average rate of 6.2 per cent. per year. Growth in this period was principally driven by service s and construction (including public infrastructure investments ). Real GDP grew by 3.8 per cent. in the third quarter of 2009, according to INSTAT, slowing from an average of 5.1 per cent. in the first half of the year. The last quarter of 2009 registered negative growth of 1.8 per cent. compared to the fourth quarter of 2008, and decreased 1.5 per cent. as compared with the third quarter of 2009. Real GDP growth for 2009 is estimated to be 3.3 per cent., primarily as a result of a decline in capital expenditures and exports. In the first quarter of 2010, GDP is estimated to have increased 2.0 per cent. compared to the fourth quarter of 2009 and is estimated to have increased 2.0 per cent. as compared to the first quarter of 2009. In the second quarter of 2010, GDP is estimated to have increased 2.4 per cent. compared to the first quarter of 2010 and is estimated to have increased 3.3 per cent. as compared to the second quarter of 2009. In the first half of 2010, GDP is estimated to have increased 2.7 per cent. as compared to the first half of 2009.
27 Expenditure on GDP The following table presents the expenditure composition of Albania’s GDP in both current prices and percentage terms for the years indicated :
2005 2006 200 7 2008 (2) 2009 (3) –––––––––––––– –––––––––––––– –––––––––––––– –––––––––––––– –––––––––––––– (AL L (% of (AL L (% of (AL L (% of (AL L (% of (AL L (% of millions) GDP) millions) GDP) millions) GDP) millions) GDP) millions) GDP) Final Consumptio n...... 724,171 88.9 771,105 87.4 874, 937 90 .4 974 ,504 89.6 1,012,982 88.4 Household consumption expenditure ...... 634,471 77.9 680,323 77.1 775 ,081 80 .1 861,890 79 .2 895,310 78 .2 General government consumption expenditure ...... 88,508 10.9 89,411 10.1 98,352 10.2 110,922 10 .2 115,817 10.1 NPI serving households (1) ...... 1,192 0.1 1,371 0.2 1,504 0.2 1, 691 0.2 1,855 0.2 Gross fixed capital formation ...... 301,354 37 .0 343,882 39 .0 374 ,058 38 .7 415,121 38.1 421,145 36.8 Public ...... 45,416 5.6 59,890 6.8 63,552 6.6 103,240 9.5 110,212 9.6 Private ...... 255,938 31.4 283,992 32.2 310,506 32.1 311,881 28.7 310,933 27.1 Net export ...... (200,824) (24.6) (208,067) (23.6) (258,520) (26.7) (290,065) (26.7) (288,257) (25.2) Exports of goods and services ...... 185,970 22.8 219,974 24.9 272,164 28 .1 319,931 29.4 326,075 28.5 Imports of goods and services ...... 386,79 4 47.5 428,04 0 48.5 530,68 3 54 .8 609,99 7 56.1 614,331 53.6 –––––– ––––– –––––– ––––– –––––– ––––– –––––– ––––– –––––– ––––– Changes in stocks/ statistical discrepancy .... (9,904 )(1.2 )(24,712 )(2.8 ) (22,805) (2.4) (11,427) (1.1) (531) 0.0 Gross Domestic Product ...... –8–1–4–,7–9–7 ––10–0–.–0 –8–8–2–, 209–– ––10–0–.–0 –9–6–7–,6–7–0 ––10–0–.–0 1–,0–8–8–,1–3–2 ––10–0–.–0 –1,–14–5–,3–4– 0 ––10–0–.–0 Not e: (1) NPI serving households represents expenditure provided by non-profit making institutions to households as social transfers in kind. (2) Semi-final data. (3) Estimated data . Source: INSTA T
Final Consumption Final consumption is the largest expenditure component of GDP. In 2009, final consumption was ALL 1,013 billion. In 2009 , final consumption as a percentage of GDP decreased by 1.2 pe rcentage points , to 88.4 per cent. of GDP, from 89.6 per cent. of GDP in 2008.
Final consumption comprises three main sub-components:
•households;
•public administration; and
•non -profit institutions serving households.
In 2009 , households comprised 78.2 per cent. of GDP, a decrease of 1.0 pe rcentage points as compared to 2008. Public administration and non-profit institutions serving households were relatively unchanged from 2008. In 2009 public administration and non-profit institutions comprised 10.1 per cent. and 0.2 per cent . of GDP, respectively.
Gross Fixed Capital Formation Gross fixed capital formation is the second main component of GDP. In 2009, gross fixed capital formation was ALL 421.2 billion, or 36.8 per cent. of GDP, a decline of 1.3 percentage points as compared to 2008.
28 The private sector comprises the largest share of gross fixed capital formation, and , during 2009 , decreased by 1.6 percentage points compared with 2008. In 2009 this sector accounted for 27.1 per cent . of the GDP, compared with 28.7 per cent. in 2008. In contrast, public gross fixed capital formation increased b y 0.1 percentage points during 2009 to 9.6 per cent. of GDP, compared with 9.5 per cent. in 2008.
The third expenditure component of GDP is net exports, which is the balance of export of goods and services less imports of goods and services. Albania has historically been a net-importer country. In 2009 , net exports were negative ALL 288. 3 billion, or negative 25. 2 per cent. of GDP. As compared to 2008 , the net exports deficit decreased by 1.5 percentage points, which was caused by a relatively higher decrease in imports of goods and services compared against the decrease in exports of goods and services. Exports of goods and services as a percentage of GDP decreased by 0.9 per cent., while the import s decreased by 2.5 per cent. as compared to 2008. In 2009, the export of goods and services comprised 28.5 per cent. of GDP, while the import of goods and services comprised 53.6 per cent . of GDP, compared with 29.4 and 56.1 per cent., respectively, in 2008.
Principal Sectors of the Economy A16.3.4(a),(b) The following table presents the value added composition of GDP by economic activity in both current prices and percentage terms for the years indicated :
2005 2006 200 7 2008 (3) 2009 (4) –––––––––––––– –––––––––––––– –––––––––––––– –––––––––––––– –––––––––––––– (AL L (% of (AL L (% of (AL L (% of (AL L (% of (AL L (% of millions) GDP) millions) GDP) millions) GDP) millions) GDP) millions) GDP) Agriculture , hunting and forestry ...... 151,640 18.6 154,648 17.5 165,748 17.1 180,329 16 .6 189,651 16.6 Industry ...... 78,319 9.6 88,207 10.0 81,693 8.4 95,665 8.8 95,716 8.4 Extracting Industry ...... 5,576 0.7 5,894 0.7 8,005 0.8 11,131 1.0 10,392 0.9 Manufacturing Industry . 72,743 8.9 82,313 9.3 73,687 7.6 84,534 7.8 85,324 7.4 Construction ...... 101,759 12.5 113,724 12.9 129,585 13 .4 145,215 13.3 145,138 12 .7 Total Services ...... 405,917 49.8 438,606 49.7 495,615 51 .2 551,323 50.7 596,018 52.0 Trade, Hotels and Restaurants ...... 159,029 19.5 166,125 18.8 185,0 37 19.1 206,098 18.9 221,667 19.4 Transport ...... 40,986 5.0 43,350 4.9 47 ,325 4.9 51,850 4.8 57,017 5.0 Post and communicatio n 28,257 3.5 31,614 3.6 37 ,208 3.8 41 ,82 93.8 52,840 4.6 Other services (1) ...... 177,645 21.8 197,517 22.4 226,044 23 .4 251,546 23 .1 264,494 23.1 FISIM (2)...... 23,50 8 2.9 30,44 6 3.5 38,681 4.0 40,902 3.8 46,609 4.1 Gross value added at basi c prices ...... 714,128 87.6 764,739 86.7 833,960 86.2 931 ,629 85.6 979,915 85.6 Taxes on products ...... 104,158 12.8 121,188 13.7 136,789 14.2 158,847 14.6 167,799 14 .7 Subsidies on products .... 3,48 9 0.4 3,71 8 0.4 3,07 9 0.3 2,34 4 0.2 2,374 0.2 GDP at market prices .... –8–1–4–,7–9–7 ––10–0–.–0 –8–8–2–,2–0–9 ––10–0–.–0 –9–6–7–,6–7–0 ––10–0–.–0 1–,0–8–8–,1–3–2 ––10–0–.–0 1–,1–4–5–,3–4–0 ––10–0–.–0 Notes: (1) “Other Services” includes public administration, health and education. (2) Financial Intermediation Services Indirectly Measure d, which “FISIM” refers to the total property income receivable by financial intermediaries minus their total interest payable, excluding the value of any property income receivable from the investment of their own funds, as such income does not arise from financial intermediation. (3) Semi-final data. (4) Estimated data . Source: INSTA T
Services The services sector is the largest sector in the Albanian econom y and comprises the trade, hotels and restaurants sub-sector, the transport sub-sector, the post and communications sub-sector and other services. The services sector as a whole represented approximately 52 per cent. of Albania’s GDP in 2009, as compared to 50.7 per cent. in 2008.
29 Tourism is considered to be a considerable driver of growth in the Albanian economy. Helped by a positive tourist season, the trade , hotels and restaurants sub-sectors increased by approximately 5.4 per cent. in 2009 as compared to 2008. According to INSTAT, the trade, hotels and restaurants sub-sectors increase d by 4.8 per cent. in the first quarter of 2010 as compared to the first quarter of 2009 . During 2009, the transport sub-secto rgrew by approximately 8.3 per cent. as compared to 2008, and the post and telecommunications sub-sector grew by approximately 28.2 per cent. as compared to 2008. In the first quarter of 2010, the transport sub-sector grew by 11.8 per cent. and 3.7 per cent. as compared to the first quarter of 2009 and the last quarter of 2009, respectively. In the first quarter of 2010, the post and communications subsector contracted by 10.1 per cent. and 13.4 per cent. as compared to the first quarter of 2009 and the last quarter of 2009, respectively . In the second quarter of 2010, the transport sub-sector grew by 8.0 per cent, and 2.7 per cent, as compared to the second quarter of 2009 and the first quarter of 2010, respectively. In the second quarter of 2010, the post and communications subsector contracted by 2.6 per cent, and increased by 0.2 per cent, as compared to the second quarter of 2009 and the first quarter of 2010, respectively.
Growth in the “other services” categor y slowed to 1.4 per cent. in 2009 as compared to 6.1 per cent. in 2008. In the first quarter of 2010, the “other services” category increased by 1 .9 per cent. as compared to the first quarter of 2009, and by 1.5 per cent. as compared to the fourth quarter of 2009 . In the second quarter of 2010, the “other services” category increased by 5.6 as compared to the second quarter of 2009 and by 1.2 per cent, as compared to the first quarter of 2010.
Agriculture Agriculture is a key sector in the Albanian economy, accounting for approximately 16.6 per cent. of GDP in 2009, the same proportion as in 2008 . In 2009 , this sector grew by approximately 2.7 per cent. as compared to 2008 and in the first quarter of 2010 it grew by 2.3 per cent. as compared to the first quarter of 2009. Albania’s principal agricultural products come from livestock, field crops and fruits. Approximately 50 per cent. of all workers in Albania are employed in the agricultural sector .
The following table sets out certain information regarding Albania’s agricultural sector for the years indicated: 2005 2006 2007 2008 2009 (1) –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– Agricultural production volume index of goods and services (producer prices, previous year = 100 )...... 100.9 103.1 102.6 107.7 102.2 Total utilised agricultural area (thousand hectares )...... 1,077 1,120 1,121 1, 181 1,201 Livestock ( thousand heads, end of year ) – Cattle ...... 655 634 577 541 494 – Pigs ...... 147 152 147 161 160 – Sheep and goats ...... 2,701 2,770 2,729 2,620 2,540 Production and utilisation of milk on farms ( total whole milk, thousand tonnes )...... 1,076 1,102 1,016 1,040 1, 045 Crop production ( thousand tonnes, harvested production ) – Cereals (including rice) ...... 511 508 494 609 629.9 – Sugar beet ...... 40 0000 – Vegetables ...... 685 688 672 715 730
Note: (1) Estimat ed data . Source: INSTAT
30 Industry Albania’s industry sector comprises the manufacturing sector and the extracting sector. Industrial output contracted by 4.6 per cent. in 2009 as compared to 2008 mainly as a result of depressed demand in Albania’s main euro-zone export markets. In the first quarter of 2010, the industry sector grew by 28.2 per cent. as compared to the first quarter of 2009, and by 20.1 per cent. as compared to the fourth quarter of 2009 . In the second quarter of 2010 the industry sector grew by 31.8 per cent as compared to the second quarter of 2009, and by 11.2 per cent as compared to the first quarter of 2010.
Albania’s primary manufacturing sub-sectors include, manufacture of food products, beverages and tobacco, manufacture of textiles and textile products , electricity production , tanning and dressing of leather, manufacture of luggage and handbags and manufacture of wood and wood products. In 2009, manufacturing accounted for approximately 7.4 per cent. of Albania’s GDP, as compared to 7.8 per cent. in 2008.
The extracting sector comprises mining and quarrying of energy producing materials, mining of metal ores and other mining and quarrying. Chromium, ferr o-nickel, copper, coal, oil and gas are among the most important sub-soil minerals in Albania. In 2009, extracting sub-sector s collectively accounted for approximately 0 .9 per cent. of Albania’s GDP, as compared to 1.0 per cent. in 2008.
Construction The construction sector has been one of the main drivers of Albania’s economic growth over the past ten year s and benefited from high levels of public investment from 2005 through 2009 . There was a high amount of construction activity during the second half of 2008 and the first half of 200 9 which was supported by th e fiscal stimulus packag e introduced by the Government and largely funded by privatisation receipts. In the second half of 2009 and particularly in the last quarter of 2009, the pace of growth in the construction sector slowed and there was less procurement for new public construction project s. The construction sector contracted by 14.9 per cent. compared to the third quarter of 2009 . As a result, the construction sector represented 12 .7 per cent. of Albania’s GDP in 2009 as compared to 13.3 per cent. in 2008. During the first quarter of 2010 construction sector contracted by 3.2 per cent. compared to the fourth quarter of 2009. During the second quarter of 2010, the construction sector contracted by 2.3 per cent. compared to the first quarter of 2010.
Financial Intermediation Financial intermediation in the Albanian economy has increased substantially from 2005 to 200 9, facilitated by an increasingly competitive banking sector . In 200 9, broad money supply amounted to 76 per cent. of GDP, while banking sector credit amounted to 37 per cent. of GDP. However, credit to GDP remains low compared to other regional economies.
Most lending is in foreign currency, comprising approximately 68 per cent. of total loans. Aggregate corporate lending is approximately double the level of retail lending.
In the fourth quarter of 2008, the global financial crisis caused declines in deposit levels, which continued into early 2009. However, aggregate credit grew year on year in 2008 and 2009, albeit more slowly, particularly with respect to foreign currency loans.
31 The following table sets out certain information on the banking sector, including with respect to credit to the private sector (“ CPS ”).
As at 31 December ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 2005 2006 2007 2008 2009 –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– (%) CPS (total)/GDP ...... 15.3 22.2 29.8 35.3 37.4 CPS (foreign currency)/GDP ...... 11.1 15.5 21.1 25.1 25.7 CPS (domestic currency)/GDP ...... 4.1 6.7 8.7 10.2 11.7 CPS (total)/deposits ...... 29.4 38.9 48.1 61.8 64.6 M3/GDP (1) ...... 70.3 75.5 78.0 75.1 76.2 Total deposits/GDP ...... 51.9 57.0 62.1 57.1 57.9
Note: (1) See “ Monetary and Financial Systems—Money Supply ”. Source: Bank of Albania As at 31 March 2010, credit to the private sector was approximately 65.3 per cent. of total deposits, as compared with 64. 6 per cent. as at 31 December 2009.
Energy Albania obtains approximately 97 per cent. of its electricity from hydroelectric source s, which causes Albania’s annual electricity production to fluctuat e. Albania typically imports approximately 30 per cent. of its energy needs from various sources under lon g-term supply contracts .
The Albanian energy sector has been substantially reformed in recent years. Market structures have been expanded following the completion of the unbundling of the sector. In 2007, the Government decided to privatise the distribution arm of the state-owned power company KESH in order to reduce losses and improve service quality. As a first step, the distribution arm was unbundled from KESH and incorporated as a separate private power distribution system operator ( “OSSH ”) in June 2007. In 2009, Albania sold a 76 per cent. stake in OSSH to the Czech power group, CEZ.
In 2009 , there was a further increase in private sector participation in power generation following the Government’s award of 50 concessions to private companies (out of a planned 100 concession s in respect of 100 small , medium and large hydroelectric power plants ). Market regulations have been approved to provide the necessary framework for the opening and functioning of the wholesale and retail market for electricity. However, competition has been limited thus far and the Albanian Energy Regulatory Authority (“ ERA ”) has only recently begun to establish itself as an effective, independent regulator.
Droughts have created energy shortages in the past and can affect Government finances both due to energy import costs and the subsidisation of the fees charged by KESH. To address the constraints on its energy sector, in recent years Albania has undertaken a number of energy-related projects to increase its energy supply. Power generation capacities have been upgraded and power supply has become more reliable. In 2009 KESH began exporting electricity to Greece. In December 2009, the Government entered into a financing agreement with Kreditanstalt für Wiederaufbau (Reconstruction Credit Institute) (“ KfW ”) for three energy projects totalling approximately €100 million in order to upgrade the electricity transmission network in south Albania and facilitate electricity distribution between Albania and Kosovo and between Albania and Montenegro. Their projects are part of the strategy to further integrate Albania into the south- eastern European grid. The relatively low quality of the electricity gri d in Albania directly affects the technical and commercial performance of the OSSH, and electricity tariffs are regulated . Pursuant to the Law No. 9072, dated 22 May 2003 “On Power Sector” as amende d (the “ Power Sector Law ”) (articles 8, 26, 2 7 and 28) the ER AE has the authority to set the prices and tariffs in the electricity sector. In order to reduce the financial strain on OSSH , electricity prices were increased by between 10 and 12.5 per cent. (depending on the amount of electricity consumed) as from 1 January 2010. Tariffs approved by the ER AE for 2010 are based on costs,
32 in accordance with the Power Sector Law. However, for 2010 to 2014, if the ER AE approved tariffs do not cover recognised costs of OSS H it shall be compensated in the next regulatory period. To date, no compensation has been paid. Albania has deposits of petroleum and natural gas but currently produces only 6,425 barrels of oil per day. Natural gas production, estimated at about 30 million cubic meters annuall y, is sufficient to meet consumer demands. The following table sets out certain information regarding Albania’s energy sector for the years indicated: 2005 2006 2007 2008 2009 –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– (TO E thousands, except as indicated) (1) Primary production of all energy products ...... 1,149 1,237 1,080 1,159 1,273 – Primary production of crude oil ... 418 500 564 578 57 6 – Primary production of hard coal and lignite ...... 15 15 15 20 20 – Primary production of natural gas ...... 10 10 16 8 8. 5 Net imports of all energy products ... 1,130 826 1,020 94 1 96 5 Gross inland energy consumption ..... 2,279 2,156 2,130 2,09 5 2,22 9 Electricity generation (thousand GWh )...... 5.5 5.6 3.0 3.9 5. 1
Note: (1) TOE means tonne(s) of oil equivalent. Source: Ministry of Economy, Trade and Energy (METE)
Infrastructure Albania’s economic growth has been hampered by its inadequate energy and transportation infrastructure despite some significant investments in both sectors during the last few years. There are occasional outages which are maintenance related and not a result of insufficient suppl y. A dvance notice is given to the public when maintenance related interruptions do take place . Nevertheless, noticeable progress has been made in improving the electricity supply and decreasing the frequency and length of outages. Although recent steps have been taken to improve Albania’s transportation infrastructure, it has a limited railway system and only one international airport. Because of the mountainous terrain and poor road conditions, overland goods transport is arduous and costly. However, the Government has invested heavily in road construction over the last three years, and the country now has a new, modern highway along its entire coastline, from Shkoder in the north to the southern resort city of Sarande. The recent completion of the 170-kilometre Durres-Kukes highway provides a major transportation corridor connecting markets in the central Balkans through Kosovo to the port of Durres.
33 Inflation The following table shows inflation rates based on changes in average consumer price index (“ CPI ”) and producer price index (“ PPI ”) in Albania for the years indicated, as compared to the previous year: Six months ended 30 June 2005 2006 2007 2008 2009 2010 (2) –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– CPI Inflation (1) ...... 2.4 2.4 2.9 3.4 2.2 3.9 PPI Inflation ...... 1.5 0.2 6.6 2.3 (1.7) 0.25
Source: INSTAT
Note s: (1) Annual average figures. (2) The average annual rate for the first six months of 2010. The average annual rate of CPI inflation for the first eight months of 2010 was 3.8 per cent.
From 2001 to 2009 the average inflation rate (CPI) in Albania was 3.0 per cent. CPI inflation averaged 2.8 per cent. during the period from 2005 to 2008. The average inflation rate (CPI) for 2009 was 2.2 per cent., which is within the Bank of Albania’s tolerance band of +/-1 per cent. around its target rate of 3 per cent. The low level of CPI inflation, especially during the first nine months of 2009 , was attributable mainly to statistical base effects (relatively high prices in 2008), reduction in broad base of inflationary pressures in the face of economic slowdown and the absence of increases in administered prices. In the last quarter of 2009 inflation increased, reaching 3.5 per cent. This increase was attributable to the depreciation of the lek, which increased the prices of imported goods.
In the first quarter of 2010, inflation accelerated, reaching 4.3 per cent., surpassing the upper band of the target. The acceleration in inflation stemmed mainly from the rise in administered prices (energy prices increased by 13 per cent.; water prices increased by 26.6 per cent. and healthcare tariffs increased by 9.4 per cent.) and the continued depreciat ion of the lek .In the second quarter of 2010, the inflatio n rate slowed, reaching 3.4 per cent .
In August 2010 and September 2010 , there was a slight increase in the annual growth rate of consumer prices , which was mainly attributable to the rising commodity prices in the international markets – in the context of still depreciating lek in annual terms – and seasonal fluctuations in agricultural prices . The a nnual inflation rate (CPI) was 3.5 per cent. in August 2010 .
Wages The following table illustrates recent wage trends in Albania:
2005 2006 2007 2008 2009 (1) –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– (ALL) Average public sector monthly wage 26,808 28,822 33,750 36,537 40,874 Official minimum wage ...... 11,800 14,000 16,100 17,000 18,000 Average monthly wage (public and private combined) ...... 19,993 21,842 27,350 33,833 N/A – Industry ...... 20,200 21,950 24,735 31,174 N/A – Construction ...... 17,361 19,184 32,085 42,424 N/A – Transport and communication ...... 28,144 31,360 36,518 38,106 N/A – Trade ...... 17,561 20,677 27,301 32,217 N/A – Services ...... 18,517 19,869 23,636 27,951 N/A
Note: (1) N/A indicates data for 2009 is not available. Source: INSTA T Structure Business Survey
34 The average monthly wage (public and private combined) in Albania for 2008 was ALL 38,833 (EUR 275.5 ).
In 201 0 there were increases of about 5.6 per cent. for lower wages, and smaller indexing increases for higher wages. In 2010, the minimum monthly wage was increased from ALL 18,000 to ALL 19,000, with increases for upper administration workers (2 -4 per cent.) lower administration (support) workers (5.6 per cent.), pre- university teachers (6 per cent.) and health sector workers (10 -12 per cent.).
Employment The table below sets forth information on Albania’s labour force and employment and unemployment levels for the periods indicated . As at As at As at 31 Decembe r 31 March 30 June –– ––––––––––––––––––––––––––––––––– –––––––––––––– –––––––– –––––––– 2005 2006 2007 2008 2009 (1) 2010 2010 –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Labour force, thousands ...... 1,085 1,084 1,383 1,290 1,043 1,045 1,049 Labour force activity rate (15-64 years) (%) ...... 54.2 53.7 65.2 61.9 N/A N/A N/A Employment rate (15-64 years) (%) .... 46.5 46.3 56.4 53.8 N/A N/A N/A Employment by main sectors (%) – Agriculture ...... 58.5 58.0 47.9 44.7 N/A N/A N/A – Industry ...... 7.9 8.0 10.4 9.4 N/A N/A N/A – Construction ...... 5.5 5.7 8.1 8.4 N/A N/A N/A – Services ...... 28.1 28.3 33.6 37.5 N/A N/A N/A Unemployed, thousands ...... 153 150 185 166 143 144.6 144.6 Unemployed (%) ...... 14.1 13.8 13.5 13.0 13.8 13.83 13.78
Note : (1) N/A indicates data for 2009 is not available. Source: Living Standards Measurement Survey conducted by INSTAT for 2005 and 2006; Labour Force Survey conducted by INSTAT for 2007 and 2008; Employment and unemployment data are based on INSTAT, except for employment data for the agricultural sector, which is based on household surveys. Une mployment rates have remained generally steady in the period from 2005 to 2009. However, the unemployment rate increased from 2008 to the second quarter of 2010 and there has been a contraction of the labour force from 2007 to mid-2010 . The registered unemployment rate increased slightly in the third quarter of 2009 as compared to the second quarter of 2009, from 12.7 per cent. to 12.8 per cent., with an approximately 1,300 increase in the number of registered unemployed persons. All job losses in that quarter were recorded in the private sector (not including agriculture), and there were no changes in that quarter in the number of employees in the public sector. The unemployment rate for 2009 was 13 .8 per cent.
Pensions and Social Insurance The pension system in Albania provides benefits to the elderly and also for disability and family (death) pension. The system covers almost 570,000 pensioners. It is financed on a pay-as-you-go basis, whereby state benefits are paid out of contributions from current workers. As of 1 July 2010, the Government raised pensions by between 4 per cent. and 10 per cent. for current and future pensioners. Albania provides for mandatory public social insurance, with universal coverage and a voluntary component. The mandatory public social insurance system provides protection also in cases of sickness, maternity, work injuries and unemployment.
35 Currently, for employed people, the contribution rate for social insurance is 24.5 per cent. of gross wages (partly contributed by the employer and subject to a maximum level which is subject to contribution of five times the minimum wage), while for the self employed the rate is 23.4 per cent. The table below summarises the division of the contribution rates between employee and employer and the rate for the self employed. Social Insurance Health Insurance Total ––––––––––––––––– ––––––––––––––––– ––––––––––––––––– (% of gross wages) Employee ...... 9.5 1.7 11.2 Employer ...... 15 1.7 16.7 Self-employed ...... 23 7 30
Privatisation Albania has carried out a major privatisation programme as part of its structural reforms towards the consolidation of a market economy. Most privatisations took place during the 1990s. Privatisation proceeds for the period from 1992 to 2009 exceeded US$800 million.
Privatisations in Albania began in the second half of 1991 with the creation of the National Privatisation Agency. Law No. 7512 of 10 August 1991 “On sanctioning and protecting private property, free initiative, independent private activities and privatisation”, recognised private property generally and the concept of privatisation of state enterprises in particular. This law also provided guidelines for full restitution of nationalised properties to the original owners, enabled local and foreign investors to start private businesses and provided legal guarantees for the protection of investors, and created a base for developing a legal framework to regulate specific sectors of the economy. In a short period, from 1991 to 1992, more than 17,000 small service and trade businesses, as well as 2,000 tracks, fishing boats, agricultural machineries and other assets were privatised through direct selling or management buyout. The privatisation process developed in steps, starting with the privatisation of small businesses, particularly service providers. This was followed by the privatisation of land, which consisted in the transfer of the land of the former collective and state farms into 450,000 units, and was made possible by Law No. 7501 of 19 July 1991 “On Land.” This process was completed by the end of 1993. The privatisation process also included the sale of approximately 220,000 state-owned apartments. The next step was the privatisation of small and medium-sized state-owned enterprises, defined as those with values of less than US$150,000 and US$500,000, respectively. More than 60,000 companies were privatised between January 1993 and April 1995. This was followed by a programme of “voucher privatisation” or “mass privatisation” for 97 joint stock state companies, in which individuals were given vouchers to “buy” shares of companies, but this initiative produced limited success. The remainder of privatisations of small and medium enterprises took place through employee buy-outs. Many companies were liquidated in this process. In 1998, a strategy to privatise major companies operating in strategic sectors was put in place. A new law outlined a privatisation strategy for sectors with significant importance to the economy such as telecommunications, postal services, mining and energy, oil and gas, forests and water, roads and railways, airports, insurance companies and state-owned second-tier banks. Large enterprises were privatised with strategic investors holding no less than 30 per cent. of the shares; medium enterprises were privatised with strategic or non-strategic investors holding not less than 30 per cent. of the shares; small enterprises were privatised by transforming them into joint stock or limited liability companies. Limited domestic capital, however, made privatisation of large enterprises difficult, and slower than initially planned. In 1999, Albania privatised its first mobile phone network, though a US$85.6 million sale to Telenor and Greece’s Cosmote. In 2001, it awarded the second mobile phone license to Vodafone. Other important privatisations include the privatisation by concession of the International Tirana Airport “Mother Teresa”, the concession of the Port of Durres, the privatisation of several water supply enterprises (Elbasan, Sarande, Durres, Lezhe, Fier and Kavaje through management contracts, and Elbasan through concession contracts); the privatisation of the mining companies Albkrom Ltd. (chromium) and AlbBaker Ltd. (copper) by concession; the privatisation of 85 per cent. of shares of the Albanian Refining and Marketing Oil with a value of €128 million and the privatisation of 76 per cent. of the shares of the fixed line telecommunications company AlbTelecom with a value of €120 million. The vast majority of economic activity is now in private hands.
36 In 2007, the Government decided to privatise the distribution arm of the state-owned power company KESH in order to reduce losses and improve service quality. As a first step, the distribution arm was unbundled from KESH and incorporated as a separate power distribution system operator (OSSH) in June 2007. In 2009, Albania sold a 76 per cent. stake in OSS H to the Czech power grou p CEZ for €102 million . Priviatisation of t he remaining strategic assets, mainly the assets of the oil company Albpetrol and Albania’s minority stake in the fixed telephone operator AlbTelecom, but the exact timing has not been determined . The following table sets out information on privatisation revenues received by Albania in millions of lek and as a percentage of GDP in the years indicated:
2005 2006 2007 2008 2009 –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– Privatisation revenues (AL L millions )...... 887 1,972 13,246 5,538 27,650 Privatisation revenues ( % of GDP )... 0.1 0.2 1.4 0.5 2.4
Source: Ministry of Finance
37 BALANCE OF PAYMENTS AND FOREIGN TRADE
Balance of Payments A16.4(c) The following table sets out Albania’s balance of payments and related statistics prepared by the Bank of Albania for the periods indicated: Six months ended 30 June 2005 2006 2007 2008 2009 2010 –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– (€ millions) I. Current account ...... (589.0) (471.0) (832.0) (1,370.3) (1,345.5) (460.1) A. Trade balance (f.o.b.) (1) ...... (1,477.0) (1,658.0) (2,104.0) (2,431.5) (2,303.7) (901.9) B. Services ...... (140.0) (32.0) 13.0 69.4 120.9 (19.0) 1. Transportation ...... (81.5) (33.7) (63.2) (94.7) (53.7) (30.9) 2. Travel ...... 56.2 36.8 79.0 112.1 167.5 6.3 3. Communications services ...... 45.8 36.1 45.1 48.0 56.9 21.9 4. Construction services ...... 0.9 0.2 (14.5) 12.5 8.7 8.6 5. Insurance services ...... (20.1) (25.6) (42.5) (78.1) (57.9) (28.6) 6. Financial services ...... (1.2) 4.2 12.3 26.1 (11.7) (2.5) 7. Computer and information services ...... (0.3) (1.8) (9.0) (2.7) (0.9) (2.0) 8. Royalties and licence fees ...... (40.9) (16.0) (13.0) (1.0) – 0.0 9. Other business services ...... (18.9) 10.4 5.9 38.4 (7.6) (3.1) 10. Personal, cultural and recreational services ...... (77.0) (50.5) 7.7 (18.0) (13.6) (7.9) 11. Government services (n.i.e )...... (3.6) 8.4 5.3 26.8 33.3 19.1 C. Income ...... 131.0 209.0 217.0 54.9 (100.6) (34.9) D. Current transfers ...... 897.0 1,011.0 1,043.0 936.8 937.9 495.8 II. Capital and financial accounts A. Capital account ...... 100.0 143.0 90.0 78.0 85.0 32.7 B. Financial account ...... 352.0 415.0 758.0 1,503.0 933.0 247.6 1. Direct investment ...... 209.3 250.3 470.0 620.0 664.2 325.3 1.1 Abroad ...... (3.3) (8.3) (11.1) (55.4) (33.9) (3.5) 1.2 In Albania ...... 212.6 258.6 481.1 675.4 698.1 328.9 2. Portfolio investment ...... (3.0) 27.2 18.5 (44.5) 14.2 (48.5) 2.1 Assets ...... (3.0) 27.2 18.5 (69.8) 12.7 (55.6) 2.2 Liabilities ...... – – – 25.3 1.5 7.1 3. Financial derivatives ...... – – – – – – 3.1 Assets ...... – – – – – – 3.2 Liabilities ...... – – – – – – 4. Other investment ...... 144.5 137.5 269.7 927.2 255.0 (29.2) 4.1 Assets ...... 7.1 (167.2) (65.4) 705.8 74.8 (64.2) 4.2 Liabilities ...... 137.4 304.8 335.1 221.4 180.2 32.7 5. Official reserve assets ...... (124.8) (206.6) (148.6) (191.9) 32.0 3.1 5.1 Monetary gold ...... – – – (0.0) (0.0) – 5.2 Special drawing rights ...... 66.9 3.2 5.3 (3.7) (49.8) – 5.3 Reserve position in the Fund ...... – – – – – – 5.4 Foreign exchange ...... (197.7) (209.7) 153.9 188.2 81.9 4.5 5.5 Other claims ...... – – – – – – III. Errors and omissions ...... 262.9 119.0 131.2 (18.7) 276.8 176.7
Note: (1) 2009 imports are valued free-on-board (f.o.b) to include transportation costs and handling at the port. An estimated coefficient on counterfeit imports is also included. Imports in the foreign trade statistics differ from imports in the balance of paymen ts in that the former includes the cost of insurance and freight (c.i.f).
38 Current account. Albania’s current account deficit widened from 2005 to 2008 primarily due to an expanding trade deficit. The widening of the current account deficit in 2008 and 2009 was particularly affected by a high level of public investments made during that period. The current account deficit in 2009 was 15.5 per cent. of GDP (almost unchanged from the 2008 ratio). Despite a reduction of the trade balance due to lower import prices (counteracted partly by a depreciation of the lek by 7.6 per cent. as compared to the euro and by 13 per cent. as compared to the U.S. dollar), an increased deficit of the income account contributed to the unchanged current account to GDP ratio. This deficit was offset in part by a high level of government expenditure on capital investments and operational expenditures during the second half of 2008 and the first half of 2009.
Trade balance. Albania’s trade imbalance is considerable. Albania continues to be an import-oriented economy and the export base remains small, narrow and undiversified, due mainly to a lack of price competitiveness, poor infrastructure, and a challenging business environment. In 2009, Albanian imports amounted to €3.054 billion and exports were €0.75 billion. The trade balance, which is the factor that has the greatest impact on the current account, recorded a deficit of €2.3 billion, equivalent to 26.6 per cent. of GDP in 2009 as compared to 27.5 per cent. of GDP in 200 8. Both imports and exports decreased in 2009 under the impact of the global downturn in trade activity. Imports totalled ALL 431 billion (€3.054 billion), equivalent to 35.3 per cent. of GDP, compared with 37.8 per cent. of GDP in 2008, while exports amounted to ALL 103 billion (€750.7 million), declining to 9.3 per cent. of GDP in 2009 from 10 .4 per cent. of GDP in 2008. The value of exported goods and imported goods decreased by 18 per cent. and 9 per cent. in 2009 as compared to 2008, respectively. The income balance deteriorated to a deficit of €100 million, from a surplus €55 million a year earlier, as a result of direct investment income outflows in connection with the global financial crisis.
In the first half of 2010, Albanian exports increased by nearly 65 per cent. in annual terms to €595 million, reaching the highest levels registered since 2008. The main contributors to the export growth have been the hydro-electric energy, raw and manufactured minerals, textiles and re-exported goods. During the first half of 2010, Albania registered a surplus in its energy trade balance for the first time. These increases were attributable to improving external conditions, deprecia tion of the lek , expansion to new markets and higher commodity prices. In the first half of 2010, aggregate imports increased by 3.4 per cent. to €1,598 billion, as compared to the first half of 2009. This increase is attributed to improved economic activity in the domestic market, related to higher capital and intermediate goods imports, as well as sustained domestic demand and tourism.
The services surplus was €120.9 million for 2009, increasing by nearly 74 per cent. year on year. Income from tourism increased to €1.3 billion, which was an increase of 11 per cent. compared with 2008, as Albania experienced a strong tourist season. The overall surplus in travel services was €167 million in 2009. During the first half of 2010, the services balance recorded a deficit of €19 millio n, markedly lower than the same period of the previous year.
Current transfers. Current transfers financed approximately 50 per cent. of the trade deficit from 2005 to 2009. While remittances from Albanians working abroad played a crucial part in the prevailing considerable surplus of current transfers, they followed a declining trend during this period as a result of the weak economic environment abroad. The services component acted as a net positive contributor particularly as a result of higher income from the tourism sector. The income component, on the other hand, after a positive net position from 2005 to 2008, had a deficit in 200 9, which was continued in 2010, and was stimulated by higher direct investment income outflows and higher interest payments . The current transfers surplus increased by 0.11 per cent. in 2009 as compared to 2008, despite a decrease in remittances from Albanians working abroad, which was compensated for by an increase of approximately € 57.3 million in other transfers. In the first half o f 2010, current transfers were lower compared to the same period of the previous year, primarily attributable to a 7.6 per cent. decrease in remittances , which amounted to €221.5 million in the first half of 2010 . The ratio of current transfers to GDP for the first half of 2010 was 9.2 per cent. The current transfers surplus financed 55 per cent. of the trade deficit, up 8.7 percentage points in annual terms.
Capital and financial accounts. The combined capital and financial account surplus financed the current account deficit throughout 2005 to 2008. Reserve assets had a minor decline in 200 9 and during the first
39 quarter of 2010, but this trend reversed in the second quarter of 2010 . The stock of reserve assets at the end of the second quarter 2010 was sufficient to cover more than 4 months of imports in goods and services. The capital account has fluctuated around its long-term mean for the period. On the other hand, the financial account has experienced a steady increase throughout these years. In 20 09, a high level of net other investments and increased privatisation receipts contributed to a large financial account surplus . Nevertheless, net in flows in the financial account were 36 per cent. less in 2009 as compared to 2008. Increased privatisation receipts for 2009 offset a reduction of new FDI and resulted in higher net FDI in 2009 as compared to 2008. In the first half of 2010, no major privatisation of public assets was carried out. FDI excluding privatisations increased by 28 per cent. during the first half of 2010 as compared to the first half of 2009 , reaching 7.4 per cent. of GDP.
Foreign Trade Albania has free trade agreements (“ FTAs ”) with Kosovo, Macedonia, Croatia, Bulgaria, Romania, Bosnia, Turkey and Moldova. In April 2006, these bilateral agreements were replaced by a multiregional agreement that entered into force in May 2007 based on the Central European Free Trade Agreement (“ CEFTA ”) model. The impact of CEFTA on Albania’s trade with member countries has been insignificant to date.
The Government signed an FTA with the EU as part of its Stabilisation and Association Agreement negotiations. The interim agreement entered into force in December 2006, with a duty-free regime for almost 90 per cent. of agricultural and industrial products.
Trade exchanges in goods and services in Albania amounted to approximately 82.2 per cent. of GDP in 2009 and 78.2 per cent. in the first half of 2010 , reflecting the small size and open nature of Albania’s economy.
The following table sets out information on Albania’s exports and imports for the years indicated: Six months ended 30 June 2005 2006 2007 2008 2009 2010 –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Value of imports: all goods, all partners (c.i.f. ) (€ millions) ...... 2,083 2,411 3,044 3,570 3,249 2,160 Value of exports: all goods, all partners (f.o.b. ) (€ millions) ...... 530 631 786 916 751 595 Trade balance: all goods, all partners (€ millions) ...... (1,553) (1,780) (2,258) (2,654) (2,498) (1,565) Terms of trade (export price index/import price index, 1998 = 100) ...... 101.5 97.9 99.1 99.6 103.3 N/A Share of exports to EU-27 countries in value of total exports (%) 89.4 88.5 83 80 79 68 Share of imports from EU-27 countries in value of total imports (%) 67.2 64.5 59.9 60.7 64.2 65
Source: Bank of Albania
Composition of Trade The following table sets forth Albania’s exports and imports of goods by principal product type as a percentage of the total exports and imports for the years indicated.
40 Six months ended 30 June 2005 2006 2007 2008 2009 2010 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––– (€ (% of (€ (% of (€ (% of (€ (% of (€ (% of (€ (% of millions) total) millions) total) millions) total) millions) total) millions) total) millions) total) Principal exports Textiles and footwear ...... 317.69 59.9 360.85 57.2 399.41 50.8 411.57 44.9 355.55 47.4 211.65 35.5 Manufacutures ...... 114.31 21.6 141.51 22.4 167.4 21.3 232.30 25.3 136.18 18.1 137.73 23.1 Minerals, fuel and electricity ...... 40.97 7.7 62.11 9.9 138.07 17.6 190.19 20.7 171.90 22.9 195.30 32.8 Food, beverages and tobacco ...... 30.05 5.7 35.11 5.6 39.47 5.0 34.91 3.8 39.37 5.2 22.52 3.8 Machinery ...... 22.16 4.2 24.50 3.9 33.06 4.2 37.95 4.1 34.80 4.6 22.84 3.8
Six months ended 30 June 2005 2006 2007 2008 2009 2010 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––– (€ (% of (€ (% of (€ (% of (€ (% of (€ (% of (€ (% of millions) total) millions) total) millions) total) millions) total) millions) total) millions) total) Principal imports Textiles and footwear ...... 260.09 12.5 284.71 11.8 339.50 11.2 354.15 9.9 296.02 9.1 153.27 9.6 Manufactures ...... 509.84 24.5 618.22 25.6 754.90 24.8 848.55 23.77 811.89 25.0 418.45 26.2 Minerals, fuel and electricity ...... 257.67 12.4 341.04 14.2 514.54 17.0 648.02 18.2 478.29 14.7 237.52 14.9 Food, beverages and tobacco ...... 337.02 16.2 398.22 16.5 468.68 15.4 537.41 15.0 518.92 16.0 268.53 16.8 Machinery ...... 488.98 23.5 484.68 20.1 630.91 20.7 783.76 21.9 741.93 22.8 317.61 19.9
Source: Bank of Albania
Textiles and footwear remain by a large margin Albania’s principal export category, accounting for 47 .4 per cent. of total exports in 2009 and 35.5 per cent. in the first half of 2010 . Between 2006 and 2009 the performance of footwear exports has overtaken that of textile exports, with textile manufacturers struggling to keep their position in their markets in the face of competition from Asian producers and slow growth in their main market, Italy. As a result, footwear exports increased by 6 per cent. year on year in 2009, while textile exports decreased by 5 per cent. Mineral, fuel and electricity exports, at €172 million, remained flat in 2009, as the significant increase in electricity exports could not compensate for a sharp drop in sales of minerals caused by the decline in international commodity prices. Mineral, fuel and electricity exports became the second largest export category in the first half of 2010 , accounting for 32.8 per cent. of the total. Exports of food and beverages increased by 7 per cent. in 2009 as compared to 2008. Food exports were boosted by sales of meat, which increased by a factor of ten, partly as a result of higher prices on international markets. However, the share of foodstuffs in total exports remained relatively low, at 5 .2 per cent. due to structural limitations in Albania’s economic sector such as the fragmentation of landholding and continued to decrease in the first six months of 2010 .
Consumer goods (mostly food and beverages, durable and semi-durable goods), machinery and equipmen t and manufactures, are Albania’s main product imports. Machinery and equipment imports increased by 1.3 per cent. year on year to a total of ALL 98 billion (€741.9 3 million) for 2009 and accounted for 22.8 per cent. of total imports. Machinery and equipment imports increased by 8.9 per cent . in the first six months of 2010 as compared to the same period in 2009 . Foodstuffs, which were the third largest category of imports, accounting for 16 per cent. of the total, increased by 2 per cent. year on year in 2009, to ALL 74.7 billion (€518.9 2 million) and by 12 per cent ., to ALL 37 billion (€268 .53 million) in the first half of 2010 as compared to the first half of 2009 . Minerals and fuels, the fourth largest import category at 14.9 per cent. of the total, declined by 21 per cent. year on year, to ALL 62 billion (€478 .29 million) in 2009 , because of lower international oil prices and reduced electricity import s. However, in the first half of 2010, minerals and fuel imports increased by 18 per cent. compared to the first half of 2009 , to ALL 32.7 billion (€237.5 2 million) . In line with exports, the percentage of imports comprised of textiles and footwear, which are processed and then r e-exported, were almost flat in 2009, although the volume declined by 16 per cent. to ALL 39.6 billion (€296 .02 million) . Imports of textiles and footwear grew by 8.9 per cent. during the first six months of 2010 as compared to the first six months of 2009 .
41 Focus of Trade The following table shows exports and imports of goods by main trading partners for the periods indicated in value and in percentage terms:
Six months ended 30 June 2005 2006 2007 2008 2009 2010 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––– (€ (% of (€ (% of (€ (% of (€ (% of (€ (% of (€ (% of millions) total) millions) total) millions) total) millions) total) millions) total) millions) total) Main destinations of exports Italy ...... 383.92 72.4 457.91 72.6 534.99 68.0 566.64 61.8 479.86 62.0 292.25 49.1 Greece ...... 55.42 10.5 60.65 9.6 65.02 8.3 80.37 8.8 57.01 7.4 31.56 5.3 Germany ...... 17.6 3.3 19.91 3.2 19.2 2.4 24.59 2.7 25.99 3.4 15.17 2.5 China ...... 2.63 0.5 7.18 1.1 20.13 2.6 25.45 2.8 37.04 4.8 38.05 6.4 Turkey ...... 9.11 1.7 8.00 1.3 17.30 2.2 17.11 1.9 4.29 0.6 29.88 5.1 Switzerland ...... 0.32 0.1 0.53 0.1 0.61 0.1 3.27 0.4 9.18 1.2 45.76 7.7
Six months ended 30 June 2005 2006 2007 2008 2009 2010 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––– (€ (% of (€ (% of (€ (% of (€ (% of (€ (% of (€ (% of millions) total) millions) total) millions) total) millions) total) millions) total) millions) total) Main origins of imports Italy ...... 610.76 29.3 677.25 28.1 826.24 27.1 945.81 26.5 862.32 26.8 438.07 27.4 Greece ...... 346.16 16.6 380.66 15.8 444.40 14.6 523.66 14.7 499.46 15.5 226.74 14.2 Turkey ...... 155.32 7.5 182.36 7.6 221.26 7.3 213.34 6.0 208.53 6.5 85.68 5.4 China ...... 139.80 6.7 144.81 6.0 203.45 6.7 266.35 7.5 238.97 7.4 92.67 5.8
Source: Bank of Albania
Albania’s principal trading partners are the EU Member States, which collectively accounted for 65 per cent. of Albania’s imports and received 68 per cent. of exports in the first six months of 2010, as compared with 64.2 per cent. of imports and 79 per cent. of exports in 2009 . Trade with Italy and Greece represent the largest share of EU trade, with a combined 41.6 per cent. of imports and 54.4 per cent. of exports in the first six months of 2010 and 42 .3 per cent. of imports and 69 .4 per cent. of exports in 2009 . Italy, with a 49.1 per cent. share in the first six months of 2010 and a 62.0 per cent. share in 2009 , remained Albania’s main export market. Trade volume with the region, excluding Greece and Italy, has remained largely constant fluctuating around the 13 per cent. ratio to total. Albania is a net importer vis-à-vis the regional countries .
China and Turkey were the two largest providers of imports to Albania from outside the EU. Imports from China declined by 24 per cent. and accounted for 5.8 per cent. of the tota l in the first half of 2010. Similarly, imports from Turkey fell by 18 per cent. and comprised 5.4 per cent. of the total in the first half of 2010 .
In the first half of 2010 , sales to Italy, the bulk of which were semi finished textile and footwear products and construction materials, increased by 28 per cent. year on year owing to recovering domestic demand. Sales to Greec e declined by 4.7 per cent. year on year as a result of the economic downtur n. In the first half of 2010, Albania expanded its export markets in Switzerland, constituting 7.7 per cent. of total exports, and to China and Turkey, constituting 6.4 and 5.1 of total exports, respectively. The total exports to Switzerland, China and Turkey in the first half of 2010 all increased from negligible levels for the same period in 2009.
Foreign Direct Investment Attracting foreign direct investment (“ FDI ”) is a key focus of the current and previous Governments. FDI has played a vital role in the development of the Albanian economy but, despite growing progressively in recent years, Albania’s FDI is still low compared to other countries in the region. Certain obstacles to Albania’s efforts to attract FDI are the subject of Government reform s inclu ding standardising and uniformly applying business laws (including, among others, intellectual property laws), improving transparency in business procedures, centralising and streamlining business services (including business registration and licensing) , resolving property ownership disputes, restructuring the tax system (including improving tax collection) and reducing corruption. Certain reforms are, however, in their early stages and Albania still lags
42 behind neighbouring economies in terms of FDI as a percentage of GDP and per capita foreign investment receipts.
There are no restrictions on foreign ownership of property or assets in Albania, except with respect to agricultural arable lands. There are no restrictions on the repatriation of profits from Albania, subject to compliance with applicable tax laws.
The following table sets out FDI inflows in Albania by industry sector for the years indicated (1) :
2005 2006 2007 2008 2009 (2)(3) –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– (€ millions) Mining industry ...... 23.40 37.00 27.49 101.61 68.00 Telecommunications ...... 39.40 62.20 133.78 13.32 N/A Banking sector ...... 44.50 29.90 121.05 184.70 119.00 Textiles and wood manufacturing ..... 63.20 69.90 57.50 72.58 N/A Other ...... 42.10 59.60 123.61 280.71 247.00 FDI excluding privatisation ...... 205.46 242.58 356.29 607.83 210.80 Privatisation receipts ...... 7.14 16.02 107.14 45.09 434.00
Note: (1) Data are obtained at the end of each calendar year through evaluations from Bank of Albania surveys . (2) Data for 2009 are subject to review. (3) N/A indicates 2009 data not available . Source: Bank of Albani a and National Agency of Natural Resource s
From January to July 2010, FDI was 9.2 per cent. lower than for the same period in 2009, and amounted to 7.6 per cent. of GDP.
43 PUBLIC DEBT
The following table sets out Albania’s public debt broken down into domestic debt and external debt, both A16.4(c) in millions of lek and as a percentage of GDP, as at the dates indicated: As at As at 31 December 30 June ––––––––––––––––––––––––––––––––––––––––––––––––––––––––– ––––––––– 2005 2006 2007 2008 2009 2010 ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– (ALL millions) Domestic debt Securities ...... 327,353 348,936 369,536 395,504 409,501 410,924 Loans (1) ...... – – – 4,952 5,527 5,458 ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– Total domestic debt ...... 327,353 348,936 369,536 400,456 415,028 416,382 ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– External debt Securities ...... – – – – – – Loans ...... 140,718 145,733 147,398 195,343 267,369 287,585 ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– Total external debt ...... 140,718 145,733 147,398 195,343 267,369 287,585 ––––––– ––––––– ––––––– ––––––– ––––––– ––––––– Total public debt ...... –4–6–8–,–0–7–1 –4–9–4–,–6–6–9 –5–1–6–,–9–3–4 –5–9–5–,–7–9–9 –6–8–2–,–3–9–7 –7–0–3–,–9–6–7 GDP ...... 814,797 882,209 967,670 1,088,132 1,145,340 1,228,06 8(2) (% of GDP) Public debt ...... 57.4 5 56.0 7 53.4 2 54.7 5 59.5 8 57.3 2 Domestic debt ...... 40.1 8 39.5 5 38.1 9 36.8 0 36.2 4 33.9 1 External debt ...... 17.2 7 16.5 2 15.2 3 17.9 5 23.34 23.42
Note s: (1) Consists only of d omestic guarante es. (2) Estimated data.
Source: Ministry of Finance
In line with Albania’s continuing expansionary fiscal policy, public debt increased to approximately 60 per cent. of GDP at the end of 2009 as compared to 55 per cent. of GDP at the end of 2008. The increase in public debt as a percentage of GDP from 2008 to 2009 was caused in part by a weakening of the lek as compared to the euro from 2008 to 2009. With the revised 2010 budget and the new mid-term macroeconomic framework, the Government has stated an intention to reduce the debt/GDP ratio every year until 2013 so that it reaches 53 per cent. in 2013. The debt/GDP ratio at the end of 2010 is projected to be 58.5 per cent . See “ Risk Factors—Risks Relating to Albania—High Level of Debt. ”
Debt Management Policy According to the Law “On State Loans, State Debt and State Loan Guarantees of the Republic of Albania”, the main goal of Albania regarding its debt management is to “obtain the necessary loan funds, by assessing its risk and cost, from the mid-term and long-term point of view, as well as the market development of state securities, by increasing its instruments and enlarging the investor base.” The Ministry of Finance prepares the mid-term strategy for the evaluation of the debt portfolio and its development . The focus of the mid-term strategy for the evaluation of the debt portfolio and its development (the “ Debt Management Strategy ”) is on state debt and guaranteed debt. The terms and conditions of this direct and contingent debt are decided by the Minister of Finance after receiving proposals from the Debt General Directorate. Generally the Debt Management Strategy focuses on public sector debt, with the exception of a minor part of domestic State Owned Entities (SOE) debt, since SOEs usually borrow externally with government guarantees. The Government has also issued guarantees for domestic SOE borrowing.
44 Albania has traditionally relied on domestic and foreign non-commercial borrowing (from multi-lateral financial institutions) as sources of funding. However, in 2008 and 2009 external commercial borrowing provided an important complementary source of funding for the Government. The Ministry of Finance is responsible for the Government’s foreign borrowing. In 2008 Albania obtained a 15-year loan in an amount of €230 million with an interest rate of 3 month EURIBOR plus 125 basis points, and in 2009 Albania obtained a syndicated loan (the “Syndicated Loan”) in an amount of €192.6 million, which matures in 2012 and has an interest rate of 6 month EURIBOR plus 965 basis points, which was arranged by a syndicate of banks, including, Deutsche Bank AG, London Branch. Deutsche Bank AG, London Branch and an affiliate of Intesa Sanpaolo S.p.A., the parent company of Banca IMI S.p.A., are among the lenders with an amount outstanding. The Syndicated Loan will be repaid in full with part of the proceeds of the issue of the Notes. See “—External Debt” below. The majority of Albania’s external debt is directly or indirectly (through special drawing rights (“SDRs”)) denominated in euros, and one of the goals of the Debt Management Strategy is to maximise Euro denominated borrowing, where possible. Another key component of the Debt Management Strategy is to increase the overall maturity of the debt portfolio.
The Organic Budget Law provides for a maximum debt to GDP ratio of 60 per cent., and in each annual budget the Kuvendi sets a net borrowing limit for the relevant year. The net borrowing limit for 2010 as set out in the 2010 revised budget is ALL 38.1 billion, as compared to ALL 81.6 billion for 2009, ALL 60.2 billion for 2008 and ALL 42.5 billion for 2007. With the Kuvendi’s approval, the Ministry of Finance can exceed the borrowing limits due to currency exchange rate fluctuations. Additionally, the Kuvendi can authorise the government to exceed the borrowing limits in case of emergencies.
Domestic Debt As at 30 June 2010, domestic debt amounted to ALL 416.4 billion (representing 59.1 per cent. of total public debt), as compared to ALL 415.0 billion as at 31 December 2009 and ALL 400.5 billion as at 31 December 2008. Treasury bills and bonds are issued through public auctions, and these securities are purchased principally by Albanian banks. Although a small number of auctions failed during the first quarter of 2009, typically the auctions are more than adequately covered and all of the auctions in 2010 have been adquately covered. The coverage ratios for auctions between January 2008 and December 2009 ranged from a low of 0.53 per cent. in October 2008 to a high of 1.39 per cent. in December 2009 and the coverage ratios for auctions between January 2010 and June 2010 ranged from a low of 1.09 per cent. in January 2010 to a high of 1.39 per cent. in May 2010.
As at 30 June 2010 approximately 60.5 per cent. of Albania’s domestic debt consisted of short term treasury bills with maturities up to one year. The Government began issuing domestic bonds (with maturities of more than one year) in 2002 and the volume of bonds issued has followed an increasing trend. Bonds as a percentage of total domestic debt have increased from 0.4 per cent. in 2002 to 39.5 per cent. in June 2010. Bonds mainly consist of 2-year bonds. The 5-year bonds consists of both fixed and floating rate bonds, the latter having an interest rate linked to the one-year treasury bill yield. 7-year bonds were first issued in 2007 but there were no new issues in 2009 and 2010 due to lack of demand from the domestic market.
As at 30 June 2010, the weighted average maturity of Albania’s domestic debt was 382 days, as compared with 406 days as at 31 December 2009. The majority of Albania’s domestic debt is short-term and needs to be refinanced within a 12-month period. Part of the long-term domestic bonds have a floating interest rate.
45 The following table sets out information on Albania’s domestic debt as at the dates indicated. As at As at 31 December 30 June ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––––––– 2005 2006 2007 2008 2009 2010 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––– (ALL (% of (ALL (% of (ALL (% of (ALL (% of (ALL (% of (ALL (% of millions) total) millions) total) millions) total) millions) total) millions) total) millions) total) 3M Bills ...... 30,815 9.4 33,188 9.5 30,695 8.3 25,774 6.5 22,870 5.6 21,589 5.3% 6M Bills ...... 69,973 21.4 65,162 18.7 57,911 15.7 54,631 13.8 47,647 11.6 47,695 11.6 9M Bills ...... 0 0.0 5,368 1.5 0 0.0 0 0.0 0 0.0 3,264 0.8 12M Bills ...... 175,129 53.5 157,523 45.1 143,605 38.9 143,819 36.4 166,952 40.8 175,440 42.7 Foreign currency revaluation ...... 11,500 3.5 12,164 3.5 15,505 4.2 23,540 6.0 18,870 4.6 664 0.2 Direct Credit ...... ––––– 0 –––0–.0 ––––– 0 –––0.– 0 ––––– 0 –––0.–0 ––3–,0–0– 0 –––0–.8 ––––– 0 –––0.– 0 ––––0– –––0.– 0 Total short term debt ...... ––287–,4–1– 7 ––8–8–.3 ––273–,4–0– 5 ––7–8.– 4 ––247–,7–1– 6 ––6–7.–0 –25–0–,7–6– 4 ––6–3–.4 ––256–,3–3– 9 ––6–2.– 6 2––48,–65–2 – ––6–0.– 5 2Y Bonds ...... 32,210 9. 8 53,120 15.2 66,460 18.0 65,730 16.6 65,247 15.9 68,757 16.7 3Y Bonds ...... 6,000 1.8 16,050 4.6 25,250 6.8 21,100 5.3 15,600 3.8 15,200 3.7 5Y Bonds, fixed ...... 0 0.0 6,360 1.8 24,110 6.5 45,910 11.6 60,315 14.7 66,315 16.1 7Y Bonds ...... 0 0.0 0 0.0 6,000 1.6 12,000 3.0 12,000 2.9 12,000 2.9 ...... ––––– –––– ––––– –––– ––––– –––– ––––– –––– ––––– –––– ––––– –––– Total long term debt ...... ––38–,2–1– 0 ––1–1–.7 ––75–,5–3– 0 ––2–1.– 6 ––121–,8–2– 0 ––3–3.–0 –14–4–,7–4– 0 ––3–6–.6 ––153–,1–6– 2 ––3–7.– 4 1––62,–27–2 – ––3–9.– 5 Total domestic debt ...... –32– 7–,3–5– 3 –1–0–0–.0 ––348–,9–3– 5 –1–0–0.– 0 –36–9–,5–3– 6 –1–0–0.–0 –39–5–,5–0– 4 –1–0–0–.0 –40–9–,5–0– 1 –1–0–0.– 0 4–1–0,–92–4 – –1–0–0.– 0 Source: Ministry of Finance
The following table sets out the weighted average original yield (at issuance) of lek denominated Government securities: Six months ended As at 31 December 30 June 2005 2006 2007 2008 2009 2010 –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– (%) Treasury Bills ...... 6.8 0 6.08 7.07 7.41 7.95 7.65 3/m ...... 5.52 5.49 5.96 6.25 6.28 6.05 6/m ...... 7.01 6.12 7.16 7.4 0 7.61 7.34 12/m ...... 7.48 6.51 7.87 8.16 9.17 8.44 Bonds ...... 8.21 7.76 8.92 9.06 9.82 9.30 2 years ...... 8.08 7.37 8.23 8.44 9.42 8.91 3 years ...... 8.72 7.72 8.52 8.98 9.74 9.60 5 years ...... – 9.68 9.82 9.46 10.85 10.18 7 years ...... – – 11.00 10.71 ––
Source: Ministry of Finance
External Debt As at 30 June 2010, Albania’s external debt totalled €2,108 million (representing 40.9 per cent. of total public debt) as compared with €1 ,938 million as at 31 December 2009 and €1,578 million as at 31 December 2008. External debt included the Syndicated Loan, which is an amount of €192.6 million and was drawn down in May-June 2009 to finance the completion of the Durres-Kukes road project. See “— Debt Management Policy ” above. External borrowings are mainly used for project financing , an d in some case s for capital expenditure s. Other than with respect to its syndicated loans, Albania’s external borrowing has not been obtained with the intention of directly financing budget deficits . The majority (52.95 per cent . as at 30 June 2010 ) of Albania’s external debt is denominated in euros. A substantial part consists of loans from the International Development Association (the “ IDA ”, an agency of the World Bank) and is denominated in SDRs. Overall, 32.79 per cent. of the total external debt as at 30 June 2010 is denominated in SDRs. Around 3 per cent. of external debt is denominated in the Arabian Currency Unit (“ ACU ”), also sometimes referred to as Islamic Dinar (the ACU has the same currency composition as the SDRs). Most of the remaining external debt (6.69 per cent.) is denominated in dollars. Other currencies consist of Japanese yen (2.29 per cent.), Kuwaiti dinar (1.32 per cent.) and South Korean Won (0.9 1 per cent.).
46 Albania’s external debt is predominantly concessional , i.e., at below market terms , as it was obtained from international financial institution s for development. Over 54.5 per cent. of the country external debt is o n concessional terms, including low rates (between 0-3 per cent.) and long maturity terms (over 20 years on average). The rescheduled debt is also entirely o n concessional terms. The level of Albania’s concessional external debt has begun to be reduced, as Albania’s economy has developed. The World Bank currently classifies Albania as an upper middle income country . In July 2010, Albania was promoted to upper middle income statu s, meaning it will be less able to rely on concessionary funding from the World Bank and IMF in the future. Commercial foreign borrowing during 2008 and 2009 with a floating rate interest rate has contributed to an increase in the floating rate part of the external debt. The following table shows Albania’s external debt by category of creditor and maturity profile as at the dates indicated: As at 31 December 30 June 2005 2006 2007 2008 2009 2010 ––––––––––– ––––––––––– ––––––––––– ––––––––––– ––––––––––– –––––––––––– (ALL (% of (ALL (% of (ALL (% of (ALL (% of (ALL (% of (ALL (% of millions) total) millions) total) millions) total) millions) total) millions) total) millions) total) Long-term debt ...... 140,718 10 0 145,733 10 0 147,398 10 0 195,3 42 10 0 267,3 69 10 0 287,585 100 Multilateral ...... 90,119 64 95,332 65 98,756 67 113,817 58 140,4 17 53 156,544 54 Bilateral ...... 38,289 27 38,890 27 39,396 27 44,292 23 56, 380 21 59,921 21 Private creditors ...... – 0 – 0 – 0 28,474 15 58,302 22 57,664 20 Rescheduled debt (1) ...... 12,310 9 11,511 8 9,246 6 8,759 4 12,270 5 13,456 5 Short-term debt ...... –– –– ––– –– 0–– –– ––– –– 0 –––– ––––– 0–––– – –––– 0–––– –––– – 0–––– ––––– 0 Total ...... –14–0– ,7––18 ––1– 0 –0 –14–5– ,7––33 –– 1––0 0 –14–7– ,3––98 ––1– 0 –0 –19–5– ,3 ––42 –– 1––0 0 –26–7– ,3 ––69 ––1– 0 –0 2–8–7,–58–5 – ––1–0– 0 Note: (1) All rescheduled debt was originally incurred before 1992 by previous Communist governments. Source: Ministry of Finance
Debt Service The following table shows Albania’s historical public debt service for the years indicated. Six months ended 30 June 2005 2006 2007 2008 2009 2010 –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– (AL L millions, except %) Interest payments ...... 26,029 25,006 25,5 94 31,307 36,30 1 19,415 Domestic ...... 24,184 22,978 23,4 98 28,386 31,408 16,462 Foreign ...... 1,845 2,028 2,096 2,921 4,89 3 2,953 Interest payments/GD P...... 3.19% 2.83% 2. 64% 2.88% 3.17% 1.58% (1) Total debt service /GD P...... 3.61% 3.35% 3.07% 3.27% 3. 67% 1.83% (1)
Note: (1) Estimated data. Source: Ministry of Finance
47 The following table presents external debt service projections for Albania’s public debt by type of debt for the years indicated. The projections are based on the existing debt stock as of 30 June 2010 . 2016- Total 2010 2011 2012 2013 2014 2015 2043 Payments –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– (ALL millions) Principal of which ...... 4,864 10,041 36,044 10,362 14,421 15,210 196,007 286,949 Guaranteed ...... 1,364 2,750 2,629 2,760 2,819 2,812 24,919 40,0 53 floating rate ...... 955 1,911 1,493 1,493 1,281 1,069 3,216 11,418 fixed rate ...... 409 839 1,136 1,267 1,538 1,743 21,703 28,635 Government debt ...... 3,501 7,291 33,416 7,601 11,601 12,398 171,089 246,897 floating rate ...... 1,109 2,294 28,582 2,274 5,329 5,660 43,888 89,136 fixed rate ...... 2,392 4,997 4,834 5,327 6,272 6,738 127,201 157,761 Interes t of which ...... 3,989 7,335 5,718 4,028 3,721 3,344 18,482 46,617 Guaranteed ...... 653 1,055 1,005 922 820 720 2,925 8,100 floating rate ...... 296 357 330 282 219 169 263 1,916 fixed rate ...... 357 698 674 641 602 550 2,662 6,184 Government debt ...... 3,336 6,280 4,713 3,106 2,901 2,625 15,557 38,5 19 floating rate ...... 2,248 4,230 2,838 1,390 1,292 1,150 4,289 17,437 fixed rate ...... 1,088 2,050 1,876 1,716 1,609 1,475 11,268 21,082 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Total ...... –––8–,8–5–3 ––1–7–,3–7–6 ––4–1–,7–6–2 ––1–4–,3–9–0 ––1–8–,1–4–2 ––18–,–5–5–4 –2–1–4–,4–8–9 –3–3–3–,5–6–6 Source: Ministry of Finance There is a higher external debt service requirement comprising principal payments on government debt in 2012 due to the €192.6 million Syndicated Loan coming due in 2012, which amounts to approximately ALL 26 .3 billion of the total amount. The Syndicated Loa n will be repaid in full from the proceeds of the offering of the Notes. The following table presents domestic debt service projections for the public debt by type of debt for the years indicated. Total future payments 2010 2011 2012 2013 2014 2015 2016 (2011-2016) –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– (ALL millions) Principal payments ...... 378,001 188,704 37,900 24,800 26,405 4,000 – 281,809 Loans ...... 3,000 –––––– – Securities ...... 375,001 188,704 37,900 24,800 26,405 4,000 – 281,809 Interest payments ...... 35,403 25,192 9,6 56 5,960 3,352 625 – 44,785 Loans ...... 19,932 –––––– – Securities ...... 15,471 25,192 9,656 5,960 3,352 625 – 44,785 –––––– –––––– –––––– –––––– –––––– –––––– –––––– –––––– Total ...... –4–1–3–,4–0–4 –2–1–3–,8–9–6 ––4–7–,5–5–6 ––3–0–,7–6–0 ––2–9–,7–5–7 –––4–,6–2–5 –––––– –3–2–6–,5–9–4 of which loans ...... 22,932 –––––– – of which securities ...... 390,472 213,896 47,556 30,760 29,757 4,625 – 326,594
Source: Ministry of Finance
Contingent Liabilities The following table sets out the contingent liabilities that arise from guarantees given by Albania as at the dates indicated: As at As at 31 December 30 June ––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––– 2005 2006 2007 2008 2009 2010 –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– (ALL millions) Publicly guaranteed debt ...... 21,453 25,687 27,413 36,560 45,788 45,945 Domestic guarantees ...... – – – 4,952 5,527 5,458 External guarantees ...... 21,453 25,687 27,413 31,608 40,261 40,487
Source: Ministry of Finance
48 Defaults Albania has not defaulted or delayed interest payments on any of its indebtedness since 1991. Albania has certain indebtedness that was originally incurred before 1992 by previous Communist governments and which has been rescheduled o n concessional terms.
Credit Ratings At present Albania’s long term ratings in foreign currency are B1 (Outlook Stable) (Moody’s) and B+ (Outlook Stable ) (Standard & Poor’s). Since its initial rating of Albania in June 2007, the Moody’s rating has remained the same, with a “Stable” outlook in all subsequent ratings . Standard & Poor’s initially rated Albania in April 201 0 and its rating of Albania has not changed .
Relationships with Multilateral Financial Institutions
European Bank for Reconstruction and Development The European Bank for Reconstruction and Development (“ EBRD ”) is the largest institutional investor in Albania. Albania has been a member of EBRD since 18 December 1991, owning 0. 1 per cent. of EBRD’s shares. EBRD has supported Albania’s transition to a market economy through the financing of various projects in different economic sectors, with an emphasis on infrastructur e. Since the beginning of its operations in Albania, the EBRD has committed €500.3 million in 36 projects in infrastructure, corporate, energy and financial sectors, with 57 per cent. in the private sector. These investments attracted additional investments of €1,679.2 million from cofinanciers and sponsors.
International Monetary Fund Albania joined the International Monetary Fund (the “ IMF ”) on 15 October 1991. Its quota during 2009 remained unchanged, at SDR 48.7 million, as did its votes (737 votes or 0.03 per cent. of the total votes of all IMF members). Albania is in the same constituency as Italy, Greece, Portugal, Malta, San Marino and East Timor.
In 2006, Albania entered into a US$28 million three-year Poverty Reduction and Growth Facility and Extended Fund Facility (PRGF/EFF) programme with the IMF. Albania completed the programme in January 2009 and thus far has not requested a new programme. Albania consults with the IMF from time to time and has discussed with the IMF the possibility of instituting a numerical fiscal rule to strengthen Albania’s fiscal framework that would provide for a lower debt-to-GDP limi t (below the present 60 per cent. threshold) and a deficit not exceeding 3 per cent. of GDP. The Government has not made a decision to implement any such fiscal rule .
World Bank The World Bank is the one of the country’s main sources of development assistance. Albania has been a member of the World Bank since 199 1 and has subscri bed to US$83.0 million of the World Bank’s shares. Albania is also a member of the IDA, the IFC, and the Multilateral Investment Guarantee Agency (MIGA), which are World Bank’s affiliated organisations. The World Bank’s mission in Albania is to help the country achieve economic and social development as it moves closer to Europe. The World Bank’s support programme aims to contribute to poverty reduction and improvements in living standards, job creation, government accountability, and infrastructure and social services.
The World Bank’s current lending portfolio to Albania is approximately US$303 million comprising projects in the social sectors (US$51 million), energy, transport, and water (US$130 million), business environment reform including land management (US$62 million), and agriculture, environment and community development (US$60 million). Ongoing analytical work focuses heavily on strengthening future sources of growth and competitiveness, improving the efficiency and effectiveness of public spending, and improving governance in the social services and the utility sectors.
Since the inception of the World Bank’s programme in Albania, 68 projects for a total amount of US$1.1 billion have been approve d. In 2008, on account of its economic growth, Albania has achieved middle
49 income status and graduated from IDA concessional flows to International Bank for Reconstruction and Development (“ IBRD ”) lending . In July 2010, Albania was promoted to upper-middle income status, meaning it will be less able to rely on concessionary funding from the World Bank and the IMF in the future.
In June 2010, the World Bank issued its Country Partnership Strategy (the “ CPS ”) for Albania covering the years 2011 through 2014. The CPS programme includes a range of projects and areas of support, including a proposed IBRD Financing programme for this five-year period . In August 2010, the IMF introduced a precautionary credit line (“ PCL ”), intended for use by countries that may benefit from having the right to borrow from a concessionary fund in the event of possible (not existing) balance of payments issues. The IMF evaluates Albania as one of the countries which fulfills the criteria to be qualified for the PCL, and Albanian authorities are considering this offer. Discussions on the matter are currently ongoing, and Albanian authorities expect to reach a decision soon.
The Council of Europe Development Bank The Council of Europe Development Bank (“ CEB ”) represents a major instrument of the policy of solidarity for its 40 member states, using its resources for the financing of social projects in order to help its countries of operation achieve sustainable and equitable growth. Albania has been a member of CEB since 24 June 1999. CEB is the biggest contributor in education and health, but also very active in spatial plannin g and employment. The CEB has financed 11 projects in Albania , with a total amount of more than €120 million loans.
The Islamic Development Bank The Islamic Development Bank (“ IDB ”) is an international financial institution aiming to foster the economic development and social progress of member countries and Muslim communities. Albania joined IDB in 199 3 and owns 0.7 per cent. of IDB’s total capital. IDB has financed more than 13 projects in Albania mainly in the infrastructure, agricultur e and health sectors, with a total amount of more than 104 million Islamic Dinar loans approved.
The OPEC Fund for International Development The OPEC Fund for International Development (“ OFID ”) is a development finance institution that aims at promoting cooperation between member states of Organization of Petroleum Exporting Countries (OPEC) and other developing countries. Cooperation with Albania began in 1992, with OFID providing financial support to infrastructure projects in such sectors as agriculture, education, health, transportation and water supply, as well as direct support to private sector initiatives. OFID has provided financing in Albania in an aggregate amount of US$63.3 millio n.
50 MONETARY AND FINANCIAL SYSTEM
The Bank of Albania A16.4 The Bank of Albania is the central bank of Albania, and its powers and responsibilities are established in the Law No. 8269, dated 23 December 1997 “On the Bank of Albania” (the “ Bank of Albania Law ”). Within its role as the monetary and supervisory authority of Albania, the Bank of Albania performs several functions such as compiling, approving and implementing monetary policy, by employing the appropriate monetary instruments to achieve the monetary policy targets. The Bank of Albania has the exclusive right to issue and circulate national banknotes and currency. Furthermore, it compiles, adopts and implements the foreign exchange regime and the exchange rate policy, while keeping and managing foreign currency reserves. As the regulator of the banking sector, has the power to issue and revoke banking licenses and supervises the banking activity to ensure the stability of the banking sector . In addition, it acts as banker, advisor to, and as fiscal agent, of the Government, while at the same time prompting the normal functioning of payment systems.
The Bank of Albania is governed by the Supervisory Council, which consists of the governor, two deputy governors and six other members. The governor and the two deputy governors are appointed by the Kuvendi.
Monetary Policy Pursuant to Article 3, paragraph 4a1 of the Bank of Albania Law, the basic task of the Bank of Albania is “to independently formulate, adopt and implement the monetary policy of Albania, consistent with its main objective”. The Bank of Albania is completely independent in setting the target for its objective, as well as the operational instruments to achieve it.
The primary objective of the Bank of Albania is to achieve and maintain price stability. Achieving and maintaining price stability implies pursuing low but positive inflation rates and preserving them for relatively long periods of time. In quantitative terms, the Bank of Albania defines price stability as the keeping of an inflation rate at 3.0 per cent., with a tolerance band of +/-1 per cent. The inflation target is measured by the annual rate of change in the total Consumer Price Index, calculated and published by INSTAT. This quantitative definition of price stability is concurrent with Albania’s status as an emerging economy, whose main priority is to join the European Union.
The monetary policy of the Bank of Albania is guided by a comprehensive assessment of current and expected economic conditions and their implications for CPI inflation. This assessment is complemented by the information received from the analysis of monetary trends and indicators. In order to achieve its objective, the Bank of Albania sets the operational framework of monetary policy instruments used to intervene in the money market. The instruments employed for this include instruments used in the open market operations, standing facilities and other liquidity providing instruments. The Bank of Albania’s primary tool for implementing monetary policy is the seven-da y maturity reverse repurchase agreement (“ reverse repo ”), which also serves as the main open market operation. The Bank of Albania has provided liquidity in the financial markets throughout 200 9 and thus far in 2010 by use of reverse repos of one-week maturity to three months. As of 1 January 2010, this has been done by way of variable-price auctions as compared with fixed-price auctions in 2009. Policy changes introduced during 2009 and 201 0 to improve the liquidity situation include : permitting Government securities with a remaining maturity up to 365 days to be used for reverse repo s; increasing the daily use of required reserves (under averaging provision) from 20 per cent. of the required reserve s to 40 per cent. ; and reducing the interest rate on overnight loans from 175 to 75 basis points above the base rate. While the first two measures are considered permanent, the last is temporary .
During 2010, the Bank of Albania has continued to provide necessary liquidity to the banking sector at lower levels compared to 2009, due to improved liquidity conditions. The Bank of Albania has also further eased monetary conditions. During 2009, the Bank of Albania’s policy interest rate was reduced twice, by 0.5 per cent. each time. At the end of July 2010, the policy rate was reduced by 0.25 per cent. to 5 per cent. The reduction in the policy rate has impacted the money markets, and the improved monetary conditions are expected to stimulate domestic demand in the coming months.
51 Money Supply A16.4(e) Monetary aggregates have generally followed a positive growth trend in the recent years, reflecting the economic performance of the Albanian economy. Money growth mainly reflects the increased intermediation of the banking sector , the growing monetisation of the Albanian economy and rapid credit expansion, partly due to foreign currency inflows in the form of remittances, credit lines and FDI. The Albanian economy is a relatively euroised economy, mainly on the liabilities side of the non-bank private sector. Foreign currency deposits (comprising mainly euro -denominated deposits) in the Albanian banking sector account ed for around 46 per cent. of total deposits as at 31 July 2010 and foreign currency loans (comprising mainly euro loans) account ed for 67 per cent. of total credit to the private sector , as compared with 43 per cent. of total deposits and 67 per cent. of total credit to the private sector as at 31 December 2009 . However, the ratio of total credit to the private sector to deposits was 6 4 per cent. as at 31 July 2010 as compared to 64.6 per cent. as at 31 December 2009.
The developments in monetary aggregates have been broadly in line with the monetary programme projections and estimations of the Bank of Albania. This has created monetary conditions compatible with price stability objective of the Bank of Albania. Accordingly, headline inflation has been mostly fluctuating within the +/-1 per cent. tolerance band , around the 3 per cent. target.
The table below sets forth certain statistics relating to money aggregates at th e dates indicated. As at As at 31 December 30 June –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––– 2005 2006 2007 2008 2009 2010 ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– (€ millions) M1 ( banknotes, coins, overnight deposits )...... 1,857 1,998 1,993 2,285 2,062 1,98 9 M2 ( M1 plus deposits in local currency (lek)) ...... 3,477 3,857 4,156 4,483 4,191 4,25 0 M3 ( M2 plus deposit in foreign currency )...... 4,716 5,444 6,221 6,589 6,317 6,38 0
Source: The Bank of Albani a
The trend of monetary indicators throughout the period from 2005 to 2008 shows growth of the money supply, mainly in the form of credit to the economy. Economic and financial developments between January 2009 and July 2010 and were broadly affected by the global financial crisis. Monetary expansion in the economy slowed down in 2009 , as a result of lower credit growth and some deposit withdrawals at the end of 2008. By January 2010, retail deposits had reached pre-financial crisis level s. Also the growth rate of the M3 money supply has been increasing recently and grew at a rate of 11.2 per cent. annuall y or €670 million in absolute terms, in the seven months ended 31 July 2010.
Foreign Reserve Assets A16.4(d) Albania’s foreign reserve assets have grown continuously from 2005 to 2010 . The Bank of Albania’s policies in managing the foreign reserve assets aim at keeping a sufficient level of reserves to cover at least four months of imports. Holding a sustainable level of reserves against imports is intended to minimise the potential pressures originating from adverse developments in the external balance of the economy. The principal factors driving the increases in the level of Albania’s foreign reserves from 2005 to 2010 were privatisations and remittances from Albanians working abroad. Although privatisation receipts increased in 2009, they are projected to be lower in 2010. Moreover, in the first six months of 2010, remittances amounted to €391.6 million, a 7.6 per cent. decrease as compared to the first six months of 2009. The level of foreign reserve assets at the end of July 2010 amounted to almost €1.7 billion, covering approximately 4.4 months of imports of goods and services .
52 The table below sets out total foreign reserve assets (including gold) held by the Bank of Albania: As at As at 31 December 30 June –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––– 2005 2006 2007 2008 2009 2010 ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– (€ millions) Value of reserve assets ...... 1,209 1,366 1,480 1,694 1,665 1,787 Monetary gold ...... 22 24 29 31 39 51 SDRs ...... 11 71555 62 Reserve position in the Fund ...... 4 4 4 4 4 4 Foreign currency ...... 1,172 1,331 1,447 1,654 1,568 1,670
Source: The Bank of Albania
Interest Rates The following table sets out the average Bank of Albania interest rates in lek for th e years indicated: Six months ended Years ended 31 December 30 June –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––– 2005 2006 2007 2008 2009 2010 ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– (%) Interest rat e(day-to-day money rate, per annum )...... 3.64 4.52 4.7 5.73 5.19 4.91 Lending interest rate (one year, per annum )...... 12.81 12.98 11.86 11.86 12.56 12.38 Deposit interest rate (one year, per annum )...... 5.09 5.23 5.66 6.80 6.77 6.59
Source: The Bank of Albania Despite fluctuations, the lending and deposit interest rates in lek have been broadly stable over the past several years. Financial market s activity and interest rates underwent considerable volatility during 2005. 2006 was characterised by increasing interest rates. The Bank of Albania’s monetary policy was generally the main factor driving interest rates higher . In 2007, interest rates on deposits increased, leading to higher savings inflows in the banking sector . Higher interest rates on euro lending narrowed the spread to lek lending during this year. Generally, deposit interest rates were raised for both lek and euro during 2008. Lending activity continued to be buoyant during 2008 as a result of strong credit demand and more favorable borrowing conditions , following increased competition for market share within the banking sector . In 2009, the average interest rate for deposits in lek during the second half of the year increase d compared with the first half. This was mainly influenced by seasonal effects and business needs for short term liquidity. The average interest rate for loans in euro increased diverging again from its reference rates. Uncertainties over economic developments, strict monitoring and the forex volatility have resulted in price increases of euro loans. Interest rates declined in the first half of 2010, due to improved market sentiment and improved liquidity positio n. Treasury securities yields have decline d since the beginning of this yea r. As of 31 August 2010, 12- month yields decrea sed by 1 28 ba sis points compared to 31 Decembe r 2009. In July 2010, the third policy rate cut by the Bank of Albani a brought the policy interest rate to 5.0 per cent., 125 ba sis points lower as compared to the beginning of 2009. Deposit interest rates for domestic currency have declined slightly in view of increased lek deposits during the first half of 201 0. Despite lower 12-month treasury bill yields, which are used as reference rate for lending, lending rates for local currencies have not decreased proportionally.
Exchange Rate Policy and Operations The Bank of Albania implements a free-floating exchange rate regime, whereby the value of the lek against foreign currencies is freely determined in the foreign exchange market by its supply and demand. The Bank of Albania intervenes in the foreign exchange market in accordance with the relevant internal regulations made transparent to the public.
53 The exchange rate developments for the period 2005-2008 reflect the stability of the Albanian lek against the basket of major currencies, principally the euro and US dollar, owing to internal domestic factors such as low inflation and overall macroeconomic stability. By the end of 2005 the lek appreciated on average by about 23 per cent. against the dollar and 11 per cent. against the euro, compared to previous three years, mainly reflecting the positive performance of the balance of payments, particularly due to foreign currency inflows through private transfers. The appreciating trend of the lek weakened during 2005 and has been broadly stable throughout 2006-2008. In 2008, the effective nominal exchange rate was affected by a wide range of developments. The lek continued to appreciate against the basket of the major currencies until the end of 2008. The lek depreciated against the two main currencies of the basket, the euro and the dollar, by 7.6 per cent. and 13.2 per cent. respectively on average during 2009. The lek manifested a faster depreciation rate during the first quarter of 2009, while the depreciation during the next three quarters was more moderate. The following tables set forth the average and period end exchange rates for lek to euro and lek to dollar for the average and the end of year or period: Six months to 30 June 2005 2006 2007 2008 2009 2010 ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– (ALL per €) Year or period end ...... 122.58 123.85 121.78 123.8 137.96 136.45 Average for year or period ..... 124.18 123.08 123.63 122.8 132.07 138.00
Source: The Bank of Albania
As at 30 September 2010, the lek to euro exchange rate was ALL 138.45 per euro and for the eight month period to 30 September 2010 the average lek to euro exchange rate was 137.49 per euro.
Six months to 30 June 2005 2006 2007 2008 2009 2010 ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– (ALL per US$) Year or period end ...... 103.58 94.14 82.89 87.91 95.81 111.44 Average for year or period ..... 99.87 98.10 90.43 83.89 94.98 101.45
Source: The Bank of Albania As at 30 September 2010, the lek to dollar exchange rate was ALL 104.80 per dollar and for the eight month period to 30 September 2010 the average lek to dollar exchange rate was ALL 104.55 per dollar.
54 The Albanian Bankin g Sector The following table sets forth information on the Albanian banking sector as at the dates and for the periods indicated: As at As at 31 December 30 June –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––– 2005 2006 2007 2008 2009 2010 ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– Number of banks ( fully foreign- owned) ...... 16 (14) 17 (14) 17 (15) 16 (14) 16 (14) 16 (14) Asset share of state-owned banks (%) 7.7 0.0 0.0 0.0 0.0 0.0 Asset share of fully foreign-owned banks (%) ...... 92.3 90.5 94.2 93.6 92.4 92.8 Non-performing loans as a % of total loans ...... 2.3 3.1 3.4 6.6 10.5 12.2 Domestic credit to private sector as a % of GDP (1) ...... 14.9 21.5 28.9 35.3 38.2 38.1 Domestic credit to households as a % of GDP (1) ...... 4.6 7.3 10.6 13.2 12.4 11.9 – of which mortgage lending as a % of GDP (1) ...... 1.9 4.3 n/a 8.3 8.7 8.2 Capital adequacy ratio ...... 18.6 18.1 17.1 17.2 16.2 16.2 Liquidity ratio (2) ...... 62.6 57.6 52.8 42.8 41.4 42. 5 Loan to deposit ratio ...... 29.2 37.7 46.7 62.2 64.2 63.2
Note: (1) For the six months ended 30 June 2010, nominal GDP is estimated at ALL 1,173.49 billion, according to IMF estimates . (2) The calculation methodology has recently changed, providing for a more restrictive “liquid assets” definition. |The “Liquidity ratio” as at 30 June 2010 according to the new methodology is 27.9 per cent. higher than the required minimum of 20 per cent . Source: The Bank of Albania
The assets of the banking sector make up approximately 94.4 per cent. of the total financial assets in Albania. The banking sector is comprised of 16 banks, of which two are jointly foreign and domestic owned, while the rest are foreign-owned. As at 30 June 2010, 92.8 per cent. of assets in the banking sector were held by foreign owned banks. Following the privatisation of the Government’s 40 per cent. equity stake in the United Bank of Albania in March 2009, the banking sector is now fully privatised. At 30 June 2010, the assets of the banking sector amounted to approximately 76.8 per cent. of the country’s GDP.
The following table shows the status of bank ownership in Albania as of 30 June 2010:
Bank Country of Ownership Assets Deposits –––––––––––––––––––––––––––––––––––––––––––––– –––––––––––––––––––––––––––– ––––––––– ––––––––– (%) Raiffeisen Bank Austria 28. 1 29 .0 National Commercial Bank Turkey 15.1 16.5 Intesa San Paolo Bank Italy 12.9 13.6 Tirana Bank Greece 8.9 7.7 Alpha Bank Greece 7.0 7.2 Credins Bank Albania 6.3 6.9 National Bank of Greece Greece 4.7 3.3 Procredit Bank Germany 4.6 4.9 Emporiki Bank France 3.2 1.5 Societe Generale Union Bank Albania 1.9 1.9 First Investment Bank Bulgaria 0.8 0.8 Italian Development Bank Italy 0.7 0.7 International Commercial Bank Malaysia 0.7 0.6 United Albanian Bank Inter American Development Bank/ Saudi Arabia 0.5 0.5 Albanian Credit Bank Kuwait 0.2 0.1 ––––––––– ––––––––– 100 .0 100 .0
55 Loan portfolio growth was strong from 2005 to 2008, albeit starting from a low base. The quality of the loans, as measured by the ratio of “non -performing loans” to “total loans”, was 12.2 per cent. as at 30 June 2010. Deposits were approximately 80 per cent. of the banking sector liabilities, and the loan/deposit ratio was approximately 63 per cent. From 2005 to 2008, the average return on equity for the banking sector was above 20 per cent. while the average return on assets was approximately 1.5 per cent. As of 31 December 2009 and 30 June 2010, the average return on equity for the banking sector was 4.6 per cent. and 8.3 per cent., respectively, while the average return on assets was 0.4 per cent. and 0.8 per cent., respectively. As of 30 June 2010, approximately 67 per cent. of the banking sector loan portfolio was denominated in currencies other than lek.
The global financial crisis has affected the Albanian banking sector, although to a lesser extent than in many other countries of the region, mainly because of Albania’s lower level of integration in the global financial markets. In the fourth quarter of 2008, the financial sector in Albania started to feel the impact of the international financial crisis. The main development was an increasing sensitivity of the public for their savings in the banking sector resulting in withdrawals of deposits denominated in lek and in other currencies. Pressure on the exchange rate began to increase at the beginning of 2009 due to a contraction in the inflow of foreign currency as a result of a decline in exports , falling FDI and remittances from Albanians working abroad. The quality of the banking sector’s loan portfolio started to deteriorate, and non -performing loans reached 8 per cent. of the aggregate banking sector loan portfolio at the end of April 2009. By the end of 2009, it increase to 10.5 per cent. and as of June 2010 , it stood at 12.2 per cent .This is expected to continue to increase albeit at a slower pace , as data from recent banks’ surveys show expectations of increased credit risk for the third quarter of 2010 . Provisions have approximately doubled during 2009 and they were 51 per cent. of no n-performing loan s or 5.4 per cent. of total loans at the end of 2009. At 30 June 2010, provisions were approximately 53 per cent. of non-performing loans, or 6.4 per cent. of total loans.
Due to a decline in interest income margins and an increasing amount of provisions, certain banks recorded losses in 2009. The net income of the banking sector declined sharply in 2009, as a result of the global financial crisis, and amounted to ALL 3.5 billion, representing less than half of the ALL 7.3 billion net income in 2008. As at 30 June 2010, the net income of the banking sector amounted to ALL 3.6 billion.
Following declining deposits in the banking sector between September 2008 and April 2009 associated with the global financial crisis, deposits began to recover in the latter part of 2009. As at 31 July 2010, banking sector deposits were ALL 743.15 billion, approximately 7 per cent. higher than they were as at 31 July 2009 . Deposits declined 1.3 per cent. from 31 July 2008 to 31 July 2009 .
Lending to the private sector slowed markedly in 2009 under the combined impact of commercial banks’ reluctance to take on additional risks in an environment marked by a rise in no n-performing loans and increased investment of funds by Albanian banks in Government securities in order to meet an increase in public sector demand for funds. The tightening was particularly pronounced in foreign currency lending, reflecting both the reduced availability of funds and increased risks related to the depreciation of the lek. This trend continued in the first quarter of 2010 but at a slower pace. The tightening of lending standards and shrinking aggregate demand have limited the growth of credit to the private secto r. In the first half of 2010, new loans increased to ALL 130.3 billion, or approximately 28.2 per cent. compared to the same period of 2009, but were still 6.3 per cent. lower compared to the same period of 2008. The increase of new loans in the first half of 2010 compared to the first half of 2009 , was attributable to increased loans denominated in foreign currenc y, which increased to ALL 84.7 billion, or by approximately 48 per cent. compared to the first half of 2009 .
The Albanian banking sector is relatively well capitalised and liquid. The capital adequacy ratio was 16.2 per cent. as at 30 June 2010 compared to the required minimum level of 12 per cent. Liquid assets as a percentage of total assets were approximately 42.5 per cent. at the end of June 2010 . The capital adequacy of the banking sector is sufficient to cover for a “worse case” scenario that combines slower economic growth, a higher level of depreciation of the lek and a higher level of non-performing loans in the banking sector.
56 Banking Supervision and Regulation Banking supervision in Albania is carried out by the Bank of Albania as stipulated in the Law No. 8269, dated 23 December 1997 “On the Bank of Albania”. In its function as the regulator of the banking sector, it licenses or revokes a lice nce on exercising banking activity and supervises the banking activity to ensure the stability of the banking sector . In addition, it acts as banker to , advisor to, and as fiscal agen t of , the Government, while at the same time prompting the normal functioning of payment systems.
In response to the effects of the global financial crisis and in particular the withdrawal of deposits from the Albanian banking sector that occurred in 2008 and 2009, the Bank of Albania has been strengthening regulatio n and supervision of the banking sector . It increased its supervision of the banking sector in areas related to credit risk management, capital adequacy, risk management by subsidiaries of foreign banks, and risk management in the context of large exposure s. To support liquidity in the banking sector, the Bank of Albania limited amounts that foreign-owned bank subsidiaries can deposit with their parent institutions , although the restriction was removed in 2010 . It has imposed prudential measures to encourage lending in lek (such as mandating higher provisioning and capital levels against foreign currency loans) in order to improve monetary policy transmission and mitigate currency risk. In September 2008, the Bank of Albania tightened counterparty restrictions, limiting exposure to a single bank to 10 per cent. of deposits from a previous level of 25 per cent.
As an integral part of its banking supervision strategy, the Bank of Albania intends to gradually adopt Basel II. To date it has drafted amendments to the regulations with respect to some aspects of the first pillar of Basel II.
Deposit Insurance As a direct response to declining deposits in the banking sector between September 2008 and April 2009, the Government increased the deposit insurance ceiling from ALL 700,000 to ALL 2.5 million (approximately €20,000) in March 2009 and the level of deposits stabilised since May 2009. The increased deposit insurance (ALL 2.5 million) covered 50 per cent. of total deposits and 96 per cent. of all depositors as of February 2010 .
Money Laundering, Terrorism Financing, Organised Crime and Anti-Corruption Regulations Albania has made progress in the fight against money laundering, terrorism financing, organised crime and corruption, through adoption of modern legislation and adherence to international conventions in these areas.
The Law No. 9917 “On the Prevention of Money Laundering and Terrorism Financing” was approved by the Albanian Parliament on 19 May 2008 based on the decree (decree No. 5746 of 9 June 2008) (the “ Money Laundering Law ”) of the President, and became effective on 10 September 2008. The new law is an expression of the necessity for sweeping improvements in these areas and demonstrates the willingness of the Government of Albania in the fight against money laundering.
Albania has recently taken further measures against organised crime. In 2009 , the Parliament passed Law No. 10192, “On preventing and striking organ ised crime and trafficking through preventive measures against assets” (the “Anti Mafia Law ”), which follows from a 2005 law on organised crime.
During 2009, 194 money laundering and financing of terrorism cases were referred to law enforcement agencies in Albania, as compared to 72 cases in 2008 and 7 cases in 2007. As at 24 September 2010, 111 cases had been referred to law enforcement agencies in 2010. Under the Money Laundering Law and the Anti Mafia Law (and earlier such legislation), €10 million of assets have been seized and €3 million of assets revoked between 2004 and 2010.
Capital Markets The Albanian domestic capital markets are not well developed and consist only of the Government debt securities market. There is generally insufficient demand for long term Government domestic securities. Banks are the main investors, and banks in Albania are, in common with other markets, mainly interested in
57 short term instruments. There is a lack of long term investors in Albania and there is no secondary trading of Government securities.
Capital Markets Regulation The Albanian Financial Supervisory Authority (the “ AFSA ”) was established on October 2006 as a regulatory and consolidated entity to supervise the non-banking financial markets in Albania. The AFSA is independent from the executive and reports annually to the Kuvendi on its activity performed over the preceding year.
The AFSA’s main functions consist in the regulation and supervision of the following:
• the insurance market and the activity of this market, which includes all insurance; reinsurance, intermediary activities and operations that stem from these activities,
• the securities market and the activity of this market, which includes the activity of entities linked with securities investments and, the entities, which operate in this market; and
• the supplementary pensions market and the activity of this market, which includes all supplementary pensions insurance activities provided by the supplementary private pension’s institutes.
Principal capital markets legislation includes the following:
• Law No. 9879 of 21 February 2008 “On Securities”. The c entral aim of this l aw is to guarantee investor protection, to regulate securities markets and to monitor public offers of securities. The law is based on EU Directives.
• Law No. 10158 of 15 October 2009 “On Corporate and local Government bonds”. The scope of this law is the development of the legal framework, improvement of the capital market s and the protection of investors.
• Law No. 10198 of 10 December 2009 “On Collective Investment Undertakings”, which is aimed at addressing the substantial investment of savings in the economy through collective investment schemes in securities portfolios.
Tirana Stock Exchange The Tirana Stock Exchange (the “ TSE ”) was established as a department of the Bank of Albania in 1996. In 2002, the TSE spun-off from Bank of Albania and continued its activity as a stand-alone institution in the form of a state owned joint stock company. The TSE has a lice nce from the AFSA to operate as an organised market on financial instruments.
The public debt and equity markets in Albania are still in infantile stages. Although the TSE is established, there has not been a public equity or debt issuance by a domestic company.
In the absence of a formal market, shares continue to be traded in an unorganised market.
Such trades consist mainly of transactions between shareholders of privatised companies, but also include transactions between shareholders of other companies .
Government Securities Retail Market During 2009, the secondary market in Government securities was dominated by treasury bills transactions, which represented approximately 89.41 per cent. of trading by volume with the reminder consisting of Government domestic bonds. In terms of number of transactions, 97.24 per cent. of all secondary market transactions in Government securities in 2009 were attributable to treasury bills. The Bank of Albania holds a significant amount of outstanding Albanian treasury bills for its own account. The Bank of Albania’s treasury bill holdings are a legacy of the 1990s, when the banking sector was underdeveloped and there was macroeconomic in stabilit y. As a result of improvements in debt management and development of the banking sector , the Bank of Albania’s participation in treasury bill financing has
58 recently been marginal. The Bank of Albania’s treasury bill portfolio has remained broadly unchanged in the last decade. However, the Bank of Albania has not been able to divest its holding s without causing undue disruption in the secondary market. The Bank of Albania uses its portfolio in open market operations. In this regard, recent changes in the Bank of Albania’s portfolio indicate the size and the scope of its intervention in the money markets and the implementation of monetary policy in line with its primary goal. Certain statistical data of Government securities retail market for 2008 and 2009 are set out in the following table: 2008 2009 Change –––––––––– –––––––––– –––––––––– (AL L millions) (%) Purchase in the primary market ...... 7,199.20 8,601.04 19.47 Individuals ...... 5,588.12 6,723.89 20.32 Legal entities ...... 1,611.08 1,877.15 16.52 Selling from the intermediaries portfolio ...... 8,457.89 20,367.23 140.81 Individuals ...... 6,693.88 8,196.13 22.44 Legal entities ...... 1,764.00 12,171.10 589.97 Purchase prior to maturity date ...... 617.90 2,950.54 377.51 Individuals ...... 604.31 1,052.54 74.17 Legal entities ...... 13.59 1,897.99 13,871.25 Pledging of Government securities as collateral ...... 97.63 82.74 (15.25) Individuals ...... 84.03 67.99 (19.08) Legal entities ...... 13.60 14.75 8.43 Payment of nominal value at maturity date ...... 6,167.63 15,150.27 145.64 Individuals ...... 5,709.81 8,988.70 57.43 Legal entities ...... 457.82 6,161.57 1,245.86
Pension Funds To improve the legal basis for the third pillar of pensions (i.e. personal pension and assets and life insurance), the Albanian Financial Supervisory Authority developed, with World Bank assistance, the Law No. 10197 of 10 December 2009 “ On Voluntary Pension Funds ”. The law sets the necessary standards in terms of regulating and supervising voluntary pension funds in compliance with the European Directives, OECD and International Organisation of Pension Supervisors principles, ther eby establishing an appropriate legal basis for establishment and development of the third column. The law is expected to have an impact on reducing social costs in the long run, by encouraging individuals to save privately and voluntarily to increase their pensions and is expected to provide a stimulus to increased domestic savings and long-term investments.
Insurance Market As at 31 December 2009, ten insurance companies, of which seven non-life insurers, two life insurers and one composite insurer continued to carry out their activity. As at 30 September 2009, Albanian insurance companies held assets of ALL 16.9 billion and investments accounted for 70.19 per cent. of total insurance company assets. Bank deposits accounted for 71 per cent. of the total investment portfolio, followed by real estate investments of 13 per cent., investments in affiliates and participating interests 12 per cent. and government securities 4 per cent. of the investment portfolio. The gross written premiums of insurers in Albania amounted to ALL 7.9 billion during 2009. The insurance market grew by 0.33 per cent. in the first eight months of 2010, as compared to the same period in 2009.
59 PUBLIC FINANCES
The budget system in Albania includes the state budget (central budget), local budget s and special funds. A16.4(a) A16.4(e) Consolidated Budget The consolidated budget includes the state budget, local budget and special funds. The following table shows a A16.4(f) summary of the consolidated budget for the years indicated:
Results of Budget Budget (1) –————————–————————–————————–——————————–———————— –———————— 2005 2006 2007 2008 200 9 2010 –———————— –———————— –———————— –———————— –———————— –———————— (ALL (% (ALL (% (ALL (% (ALL (% (ALL (% (ALL (% millions) GDP) millions) GDP) millions) GDP) millions) GDP) millions) GDP) millions) GDP) Total Revenue ...... 204,163 25.1 229,444 26.0 251,555 26.0 291,238 26.8 298,981 26.1 333,658 27.2 Grants ...... 6,168 0.8 8,025 0.9 1,280 0.1 4,228 0.4 4,430 0.3 6,310 0.5 From tax offices and customs .. 135,605 16.6 155,102 17.6 176,808 18.3 205,292 18.9 208,870 18.3 229,709 18.7 V.A.T...... 64,534 7.9 74,268 8.4 87,771 9.1 107,094 9.8 110,062 9.6 121,984 9.9 Profit Tax ...... 19,237 2.4 22,258 2.5 21,077 2.2 18,108 1.7 17,149 1.5 17,235 1.4 Excise Tax ...... 18,523 2.3 22,997 2.6 28,731 3.0 32,510 3.0 33,504 2.9 38,709 3.2 Personal Income Tax ...... 7,402 0.9 8,580 1.0 14,850 1.5 24,498 2.3 26,820 2.3 28,698 2.3 National Taxes and others ...... 12,281 1.5 13,006 1.5 14,531 1.5 14,423 1.3 13,405 1.2 15,550 1.3 Customs Duties ...... 13,629 1.7 13,991 1.6 9,848 1.0 8,660 0.8 7,929 0.7 7,533 0.6 Revenues from Local Government ...... 12,019 1.5 11,112 1.3 9,366 1.0 11,307 1.0 12,149 1.1 15,479 1.3 Local taxes ...... 8,225 1.0 8,486 1.0 7,134 0.7 8,724 0.8 9,663 0.8 12,245 1.0 Small Business Tax ...... 3,793 0.5 2,626 0.3 2,232 0.2 2,584 0.2 2,486 0.2 3,234 0.3 Social Insurance Contributions 36,192 4.4 39,309 4.5 41,989 4.3 47,822 4.4 49,812 4.4 53,896 4.4 Social Insurance ...... 33,056 4.1 35,743 4.1 37,562 3.9 42,775 3.9 44,344 3.9 46,482 3.8 Health Insurance ...... 3,136 0.4 3,566 0.4 4,427 0.5 5,047 0.5 5,467 0.5 6,014 0.5 Revenues for ex-owners compensation ...... 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 1,40 0 0. 1 No n-T ax Revenue ...... 14,178 1.7 15,895 1.8 22,112 2.3 22,588 2.1 23,720 2.1 28,264 2.3 Profit transferred from BOA .. 4,953 0.6 5,211 0.6 5,010 0.5 5,700 0.5 6,241 0.5 6,000 0.5 Budgetary institutions revenue 7,172 0.9 8,233 0.9 9,458 1.0 15,810 1.0 13,895 1.3 16,364 1.3 Other/not allocated ...... 2,054 0.3 2,451 0.3 7,644 0.8 1,078 0.5 3,584 0.3 5,900 0.5
Total Expenditure ...... 232,339 28.5 258,816 29.3 285,674 29.6 351,492 32.3 379,863 33.2 371,767 30.3 Personnel expenditures ...... 53,674 6.6 56,709 6.4 59,087 6.1 66,621 6.1 62,359 5.5 66,867 5.4 Wages ...... 42,801 6.3 45,575 5.2 49,663 5.1 55,983 5.1 53,272 4.7 56,180 4.6 Social insurance contributions 10,873 1.3 11,134 1.3 9,425 1.0 10,637 1.0 9,087 0.8 8,409 0.7 Contingency of new policie s.. 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 2,278 0.2 Interest ...... 26,029 3.2 25,006 2.8 25,594 2.6 31,307 2.9 36,301 3.2 43,526 3.5 Domestic ...... 24,184 3.0 22,978 2.6 23,499 2.4 28,386 2.6 31,408 2.7 36,200 2.9 Foreign ...... 1,845 9.2 2,028 0.2 2,096 0.2 2,921 0.3 4,893 0.4 7,326 0.6 Operational & Maintenance .... 24,515 3.0 22,800 2.5 25,259 2.6 28,788 2.6 32,058 2.8 30,760 2.5 Subsidies ...... 3,653 0.4 3,829 0.4 3,536 0.4 2,555 0.2 2,004 0.2 1,835 0.1 Energy support ...... 0 0. 000.0 5,000 0.5 0 0.0 0 0.0 0 0.0
60 Results of Budget Budget (1) –————————–————————–————————–——————————–———————— –———————— 2005 2006 2007 2008 200 9 2010 –———————— –———————— –———————— –———————— –———————— –———————— (ALL (% (ALL (% (ALL (% (ALL (% (ALL (% (ALL (% millions) GDP) millions) GDP) millions) GDP) millions) GDP) millions) GDP) millions) GDP) Social insurance outlays ...... 55,876 6.9 60,029 6.8 69,892 7.2 76,199 7.0 96,725 8.5 108,768 8.9 Social insurance ...... 49,006 6.0 53,783 6.1 60,824 6.3 65,823 6.1 73,745 6.4 79,419 6.5 Contingency of new policies .. 2,700 0.2 2,000 0.2 Health insurance ...... 6,870 0.8 6,246 0.7 9,068 0.9 10,376 1.0 22,980 2.0 25,649 2.1 Expenditure for compensation of ex owners ...... 1,700 Local Budget (Grant) ...... 19,999 2.5 22,713 2.6 21,340 2.2 27,079 2.5 33,583 2.9 30,395 2.5 Other expenditures ...... 10,218 1.3 13,775 1.6 14,768 1.5 17,750 1.6 19,129 1.7 19,542 1.6 Unemployment insurance benefits ...... 915 0.1 937 0.1 869 0.1 825 0.1 868 0.1 950 0.1 Social assistance ...... 9,303 1.1 12,838 1.5 13,491 1.4 15,925 1.5 16,060 1.5 16,542 1.3 Compensation for the political persecuted ...... 0 0.0 0 0.0 0 0.0 1,000 0.1 2,200 0.2 1,400 0.1 Housing subsidy Energy compensation ...... 0 0.0 0 0.0 408 0.0 0 0.0 0 0.0 650 0.1 Property Compensation ...... 0 0.0 0 0.0 500 0.1 0 0.0 1,739 0.2 0 0.0 Reserve fund/ contingency ...... 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 5,230 0.4 Indemnification for Gerdici damages ...... 0 0.0 0 0.0 0 0.0 2,390 0.2 85 0.0 0 0.0 Capital expenditures ...... 38,375 4.7 51,108 5.8 57,040 5.9 93,783 8.6 95,881 8.4 66,045 5.4 Domestically financing ...... 24,321 3.0 35,440 4.0 48,220 5.0 50,196 4.6 75,600 6.6 41,874 3.4 Transfer to OST ...... 0 0.0 0 0.0 0 0.0 150 0.0 0 0.0 0 0.0 Foreign financing ...... 14,054 1.7 15,668 1.8 8,819 0.9 43,587 4.0 20,281 1.8 24,171 1.9 Other KESH Transfers ...... 0 0.0 2,848 0.3 3,000 0.3 2,500 0.2 0 0.0 -1,200 -0.1
Not e: (1) Figures reflect the 2010 Budget Law , as revise d July 2010. Source: Ministry of Finance
The initially planned deficit for 2009 was 4.3 per cent. of GDP. However, the 2009 state budget included a contingency line of approximately 1.3 per cent. of GDP to address fiscal downside risks. During the budget implementation phase, these contingency funds were partly used to increase public sector wages and pension funding as at May 2009. After the 28 June 2009 general elections, on 3 July 2009, the government adopted the Medium Term Budget Programme 2010-2012. Over the first seven months of 2009, revenue performance was 6.5 per cent. below target and it became clear that the budget would need to be amended. A budget rebalancing was prepared and approved by the Kuvendi in September 2009, revising the budget deficit target for 2009 from 4.3 per cent. to 6.4 per cent. of GDP. At the end of 2009, the actual budget deficit was 7.06 per cent. of GDP.
Deficit financing in 2009 relied primarily on domestic sources, which accounted for 87.4 per cent. of the ALL 80.8 billion deficit, including privatisation receipts of ALL 25.1 billion, equalling 2.2 per cent. of GDP. Actual domestic borrowing in 2009 amounted to 6.17 per cent. of GDP, as compared to 1.4 per cent. of GDP in 2008. This was the highest level of net domestic borrowing by Albania since 2000. Foreign financing, mostly in the form of the €192.6 million Syndicated Loan obtained in mid-2009, amounted to approximately 2 per cent. of GDP in 2009. The Government’s expansionary fiscal policy increased the public debt to approximately 60 per cent. of GDP at the end of 2009, up from 55 per cent. of GDP a year earlier. See “Public Debt ”.
The Government introduced a stimulus package during 2009. The fiscal expansion worked largely by stimulating demand through:
• a higher level of public investment in capital projects amounting to ALL 75.6 billion or 6.6 per cent. of GDP domestically financed in addition to 20.3 billion or 1.8 per cent. of GDP of capital investments financed by foreign sources. The actual figure of total public investments for 2009 was ALL 95.9 billion or 8.4 per cent. of GDP;
61 • a differentiated increase of public sector wages, where the wages of civil servants increased by between 3 per cent. and 15 per cent.; and
• a pension increase for urban and rural recipients by 10 per cent. and 20 per cent. respectively.
The wages and pension increases included in the stimulus package were part of budget policy envisaged in the 2009 budget adopted in November 2008, although the increase in public investment was funded by privatisation revenues.
Budget Process A16.4(a) The beginning of each budget year is preceded by a detailed Integrated Planning System calendar with processes and respective deadlines, which is approved by the Strategic Planning Committee and then takes the final approval in Council of Ministers. In the month of January, the Ministry of Finance prepares a three- year macroeconomic and fiscal framework, which provides the basis for setting out the expenditure ceilings for each budgetary institution, based on their policies and past performance. Within these ceilings the budgetary institutions prepare their budget requests as part of the Medium Term Budget Program me preparation process for the following three years. The budget requests are prepared taking into account the criteria set for that purpose in the Organic Budget Law, which requires each budgetary institution to define their policies with all related elements and attached costs to achieve them. The budget requests are then submitted to the Ministry of Finance, which analyses their compliance with government objectives and the available funds, and eventuall y makes recommendations. The Ministry of Finance then prepares the final Medium Term Budget Program me document and the Annual Budget Law, which are both presented for review to the Strategic Planning Committee and for final approval respectively to the Council of Ministers and National Assembly. According to Law No. 9936 dated 26.06.2008 “Management of the Budgetary System in the Republic of Albania”, in January the Ministry of Finance issues the budget implementation instruction which establishes rules, procedures and deadlines for all budgetary institutions during the budget implementation process. The Ministry of Finance approves the initial breakdown of budgetary funds for each spending unit of the budgetary institutions and is responsible for ensuring that the breakdown of budgetary funds is reflected on time in the Treasury System, in accordance with the budget implementation instruction.
During the budget year, each budgetary institution has the right to submit requests for reallocation of their approved funds between its own spending program me s to the Council of Ministers for review and approval. The reallocation amount cannot exceed 10 per cent. of the approved fund for that determined spending program me . According to the Organic Budget Law, all budgetary institutions are required to submit to the Ministry of Finance periodic (at the end of each trimester) reports regarding the status and progress of their performance in terms of policy and financial achievements. The Ministry of Finance revises the reports and eventually makes recommendations for improvements to the respective budgetary institutions. The Ministry of Finance’s second trimester overall monitoring report serves as a basis for the macroeconomic and fiscal framework review in this period. The third trimester Ministry of Finance overall monitoring report provides feedback in the MTBP and annual budget preparation process, for subsequent years. By 30 April, the Minister of Finance submits to the Council of Ministers the consolidated annual budget implementation, and the Council of Ministers submits it to the Kuvendi by 30 May. This report includes: • annual consolidated accounts for state financial transactions; • report on the annual budget implementation against approved funds; • report on public debt and its composition; • report on the use of the reserve and contingency fund; and • information on achievement of objectives, status of financial management and internal control and internal audit. The consolidated annual budget implementation report is audited externally by the State Audit Office. A16.4
62 2010 Consolidated Budget The 2010 consolidated budge t which , as adopted in the 2010 Budget Law in November 2009, was based on an assumption of 5.5 per cent. growth in real GDP and a significant increase in revenue, which would result in a deficit of 4.0 per cent. of GDP.
In January 2010, the Government revised the 2010 budget figures to address the impact of global financial crisis on Albania’s economy. The revisions reduced total revenues and total expenditures, while keeping the initial level of the budget deficit of 4.0 per cent. and retaining the assumption of GDP growth of 5.5 per cent. In July 2010, the Kuvendi approved further revisions to the 2010 Budget Law. As a result, total revenues were reduced to ALL 333.7 billion or 27.2 per cent. of GDP, while total expenditures decreased to ALL 371.7 billion or 30.3 per cent. of GDP. These revisions facilitated the decrease of the budget ed deficit to 3.1 per cent. of GDP.
The recently revised 2010 Budget Law provides for current expenditure of ALL 301.7 billion, amounting to 24.6 per cent. of GDP, as compared 24.7 per cent. of GDP in 2009, as servicing debt is budgeted to increase to 4.2 per cent. of GDP as compared to 3.7 per cent. of GDP in 2009 due to an increase in the level of public debt. Part of total capital expenditure is to be financed from domestic sources (representing 3.4 per cent. of GDP), with the remainder financed through foreign sources (representing 1.9 per cent. of GDP). Infrastructure projects constitute the largest share of total capital expenditure, while investments in sectors such as health and education continue to be a priority .
The Ministry of Finance intends to rely on contingencies (expenditure that can only be executed if revenue targets are met) and expenditure cuts, if necessary, in order to control the budget deficit for 2010. See “ Risk Factors—Risks Related to Albania—Fiscal Risks ”.
Local Budgets The Organic Budget Law sets out the rules and procedures with regard to the interaction of national and local budgets. The Ministry of Finance, through the Budget Preparation Instruction issued for general government units twice a year (in the month of February and July of each year), provides the local government units with the estimates of respective unconditional transfers from the Central Budget. Upon receiving the Budget Preparation Instructions, local government units start preparing their budget proposals by reconciling the unconditional transfer estimates with their own revenues estimates, and submit for approval to their respective Councils. In addition to unconditional transfers, local government units are entitled to obtain conditional funds from central government units following the shared functions in some sectors such as: education, health and social protection. The Organic Budget Law also sets out the principles and rules for each local government unit with regards to their rights to obtain loans for financing only investment projects. The Law No. 9869 , dated 4 February 2008, “On Local Borrowing”, offers the opportunities to finance the investment program me of local governments. It defines debt broadly, to include any monetary obligation or liability created by a financing agreement, the issuance of securities, or a guarantee to third parties. The local government’s long-term borrowing is subject to preliminary approval by the Minister of Finance in regard to its procedures, limits and effects. The Chairman of the local government units submits, for information, a copy of the budget implementation and monitoring reports to the respective Local Government Council. The unconditional transfer system was put into place in 2002. It is primarily a formula-based distribution system and local governments may spend the unconditional transfers according to their own priorities (including the decision to spend on current operating expenditures or capital investments). The pool of unconditional transfers is allocated to the various local governments (regional councils, municipalities, and communes) according to a multiple step proces s, which takes into account factors such as geography, population, economy and infrastructure in allocating the funds . The council of the local government unit is responsible for approving, by special decision, the annual budgetary revenues and appropriations for the local government units and their special funds, through which it gives the right to undertake expenditures in exercising their functions as well as borrowing for investment projects. The chairman of the local government unit proposes the main directions of policies of the local government unit and proposed budget to the respective council of the local government unit.
63 Revenues A16.4(f) Taxes are the principal source of revenues for the consolidated budget. The tax system in Albania consists of three main categories of taxes: direct taxes on income; social and health contributions; and indirect taxes on consumption. Budget revenues in Albania rely heavily on indirect taxation, namely VAT and excise duties, which accounted for 53 per cent. of total tax revenues in 2009 and 49 per cent. of total consolidated budget revenues. Taxes on income accounted for 19.3 per cent. of tax revenues, and revenues from social and health contributions accounted for 18.4 per cent. of total tax revenues, in each case in 2009. Central government taxes are collected by the Tax Administration, except for duties levied on imports (primarily custom s duties, VAT on imported goods and excise duties) which are collected by the Customs Administration. From 2005 to 2009, consolidated budget revenues increased annually by 10.3 per cent. on average. Tax revenues (i.e . consolidated budget revenues minus grants and non tax revenues) increased annually by an average 10.4 per cent. during this period. Tax revenues in 2009 were 11 per cent. lower than initially budgeted 2009, increasing only 2.7 per cent. as compared to 2008. For the period from January to September 2010, revenues were 3.7 per cent. lower than for the same period in 2009, although some categories, such as personal income tax, taxation of dividends and equities, increased. The main taxes levied in Albania are personal income tax, VAT, excise duties, profit tax, small business tax (local), customs duties, property tax (local), taxes on vehicles, other local and national taxes (including environmental taxes) and social and health contributions. Each of them is imposed by law and regulated also by sub legal acts. Tax on personal income is the most important direct tax. VAT was introduced in Albania in 1995 and is regulated by Law No. 7,928 of 2 7 April 1995, “On Value Added Tax”, as amended. Persons and companies involved in any economic activity, including exporting or importing, but excluding farming, must be VAT-registered if they have an annual turnover of ALL 5 million or more (€37,500) per calendar year. The general VAT rate is 20 per cent. for domestically produced and imported goods and services. VAT is levied on the ex-factory price of domestic products and on the c.i.f. value of imports plus the sum of import duties and other charges, including excise taxes. Exports and international transport services are zero rated. Certain exemptions to VAT apply, including medicines; the supply of private and public educational services; the supply of financial services, except non-life insurance premiums, which are taxable at the standard rate of 20 per cent.; gold, bank notes or currencies supplied to the Bank of Albania; postal services; the sale of buildings; and certain operations of non-profit organisations. Research and development for hydrocarbon operations; printed materials of any kind, imported or domestically produced; promotional and advertising services from electronic and printed media; and the activities of gambling are also exempt from the VAT. Also exempted from VAT are goods in transit, and imports of goods under the active processing regime for export purposes. VAT is applied on a national treatment basis, in the sense that the normal standard rate of 20 per cent. is applied equally on imported and domestic products and services. Special VAT schemes apply in certain cases. For example, payment of VAT may be postponed for 12 months (or for a longer period, following specific approval by the Minister of Finance) on the importation of investment goods used in the economic activity of a taxable person and on imported machinery for re sale. Farmers, who are not subject to the VAT, may benefit from compensation for certain eligible products sold to VAT taxable subjects. The current excise tax legislation was adopted in 2002, by the Law No. 8976 of 1 2 December 2002 “On excise duties in Albania)”, as amended. Excise taxes are levied on coffe e; beer, wine, alcohol, and other spirits; tobacco and tobacco products; petroleum by-products; incandescent bulbs; tires; plastic and glass packaging; firewalls; piles and batteries . All excise duties are expressed in lek per unit of product, with the exception of cosmetics and incandescent lamps, and rates differ among and within product groups. Exemptions to excise taxes apply on exports and approved customs or tax suspension regimes as well as gas oil and by products used in oil research activities. Excise tax is refundable on: exports; approved suspension regimes; gas oil used for fishing boats; and fuel used by producers of electricity resources of 5 MW or more for each energy resource, as well as fuel used in the production of agriculture products in heated greenhouses.
64 Law No. 8438 dated 28 December 1998, as amende d, governs income tax for natural and legal persons. Personal income tax applies to several income sources of individuals, such as wages and salaries, income from interest payments, income from dividends, income from intellectual property rights, income from the sale of immovable property and some other minor categories. In 2008 the personal income tax rate was decreased from 23 to 10 per cent., and currently all personal income is taxed at a rate of 10 per cent. For wages and salaries only, an exemption threshold applies for incomes lower than ALL 30,000, the first ALL 10,000 of which is tax-free. Profit tax applies to all domestic and foreign companies engaging in economic activities in Albania, on all of their sources of income based in Albania. Foreign companies based abroad but with activities in Albania are taxed only on the basis of their Albanian operations. In 2008 the profit tax rate was decreased from 20 to 10 per cent., and currently all corporate revenues are taxed at a rate of 10 per cent. Taxable income includes corporate earnings, distributed stock dividends, income from the lease and transfer of real property, and interest on bank deposits and securities. In accordance with Law No. 8438 there is a withholding tax of 10 per cent. on dividends, royalties, interest, and technical service and management fees paid to both residents and non-residents. For non-Albanian residents, the withholding tax rate may be reduced by an applicable double tax treaty. Law No. 9632 of 30 October 2006 provides for the application of a tax on small businesses, defined as those with an annual turnover of less than ALL 8 million (approximately €58,400). This tax is applied instead of income tax on profits and is divided into two categories: a fixed amount on turnover of up to ALL 2 million (approximately €15,000), plus a proportional tax of 1.5 per cent. on income of between ALL 2 and 8 million. Social contributions rates have declined in recent years. Employers now pay a rate of 15 per cent. on gross wages as social contribution on behalf of employees. In 2006 , this rate was 29 per cent. The total contributions rates for health and social protection are: 16.7 per cent. of gross wage paid by the employers, and 11.2 per cent. of gross wage paid by the employees, for a total contribution rate of 28 per cent. of the gross wage. The Government also applies a reference wage system for the purpose of determining the level of social contributions which differ by economic sector, level of qualification and region. National taxes are regulated by Law No. 9975, date 28 July 2008, as amended. This law brought substantial changes in the system of national taxes reducing the tax mix from the existing 23 different types of national taxes to seven . The remaining part was transformed to tariffs and some other s abolished. The ne w group of national taxes includes road circulation tax, carbon tax, packages tax, tax on transactions of used motor vehicles , port tax, mineral rent tax, stamp tax, tax for registration of casino s and gamblin g and tax for fishing activities. From 2005 , total revenues have increased faster than nominal GDP. In 2005 the ratio of revenues to GDP was 25.1 per cent., in 2008 it was 26.8 per cent. of GDP and in 2009 it was 26.1 per cent. of GDP. Total revenues in 2009 amounted to ALL 298.9 billio n, 20.9 billion less than the target for 2009; the increase compared to 2008 was relatively modest, at the level of 2.7 per cent. Tax revenues in 2009 were ALL 270.8 billion, representing annual nominal growth of 2.4 per cent. In 2009 revenues were adversely affected by a number of factors, including: an estimated real GDP growth rate of 3 per cent. in real terms compared to the initial estimate of 6.5 per cent. real GDP growth made at the end of 2008; an average inflation rate of 2.2 per cent.; worse than expected performance of imports, in terms of volume and value, affected negatively by the reduced domestic demand for imported goods, the decrease in import prices (especially for construction materials, cereals and fuels). The value of imports affects directly revenues from VAT on imports, customs duties and other minor import duties. Imports of excise goods also decreased compared to the initial expectations for 2009. Revenues from excise increased little compared to 2008, although tax rate increased for some of the goods (namely coffee, cigarettes, alcoholic beverages, incandescent bulbs, etc).
For the period from January to August 2010, actual revenues received totaled ALL 206.1 billion, representing an increase of 5.8 per cent . as compared to the same period of 2009 . Tax revenues were ALL 187.8 billion, 5.1 per cent. more than the same period of 2009 , while revenues from tax and customs increased by 5.7 per cent . as compared to the same period of 2009.
65 Expenditure A16.4(f) From 2005 to 2008, total expenditure was increased from 28.5 per cent. of GDP in 2005 to 32.3 per cent. of GDP in 2008 due to higher levels of capital expenditures, which increased from 4.7 per cent. of GDP in 2005 to 8.6 per cent. of GDP in 2008. Current expenditure gradually declined from 23.8 per cent. of GDP in 2005 to 23 per cent. of GDP in 2008 in line with the Government ’s policy of reducing administrative costs.
As a percentage of GDP, the actual level of total expenditure in 2009 was the highest in a decade, totalling 33.2 per cent. of GDP. The high level of expenditures to GDP resulted from the expenditures based on privatisation receipts, which were 2.2 per cent. of GDP. The original 2009 consolidated budget had envisaged a deficit of 4.2 per cent. of GDP, and included wage and pensions increases made during the year. In September 2009 the Government revised the initial 2009 consolidated budget to reflect the high level of privatisation receipts, which were used to offset a fall in revenue and to maintain the budgeted level of capital expenditures.
The actual level of capital expenditures amounted to 8.4 per cent. of the GD P in 2009, almost equalling the 2008 peak of 8.6 per cent. of GDP. The high level of capital expenditure in 2008 and 2009 was related to the construction of the Durre s-Kukes road which was financed by the Governmen t. Certain sections of the road were completed in 2009 and it was finally completed in 2010 .
Special Funds While Albania’s public finance system does not include extra-budgetary funds, the Organic Budget Law includes a concept of special funds, which are consolidated in the budget. A special fund has its own revenues and expenditures but is not self-funding. Local government special funds are proposed to the Minister of Finance by the council of the relevant local government. The law for the establishment of a central or local government special fund defines:
• the purpose of the creation of the special fund;
• the administrative unit of the special fund, which could be from central or local government, independent or a subordinate of another unit;
• the sources of financing and balancing of the special fund;
• the consolidation approach with the central or local government accounts; and
• the timeline and closure procedures of the special fund.
These cover three specific funds: the Social Insurance Fund, Health Care Fund and Property Compensation Fund. Revenues and expenditures of the special funds are shown in separate line items in the revenues and expenditure sections of the consolidated budget.
Budget Deficits The budget deficit from 2005 to 2008 averaged 3.5 per cent. of GDP, with the exception of 2008 where the budget deficit reached 5.5 per cent. as a result of high levels of capital expenditure, which total 8.6 per cent. of GDP.
The Government made a final budget revision in December 2009 as a result of lower than expected revenue receipts , increasing the estimated deficit to 6.9 per cent. of GDP. Excluding expenditures associated with privatisation receipts, the projected deficit was 4.5 per cent. of GDP, only slightly larger than the deficit of 4.2 per cent. of GDP that has been provided for in the 2009 budget prior to the 2009 revision . In 2009, in accordance with the annual budget law, Albania applied half of privatisation receipts (which do not comprise revenues in the budget), to capital expenditure. This has the effect of increasing the budget deficit because expenditures increase while revenues do not . As a consequence, the actual budget deficit for 2009 was 7.06 per cent. of GDP.
The 2010 budget, as revised in July 2010, provides for a deficit of 3.1 per cent. of GDP.
66 2010 2005 2006 2007 2008 200 9 Budge t(1) ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– ––––––––– (ALL millions, except %) Overall deficit ...... (28,176) (29,372) (34,119) (60,254) (80,883 )(38,109 ) Overall deficit ( % GDP )...... (3.5) (3.3) (3.5) (5.5 )(7.06 )(3.1 ) Deficit financing ...... 28,176 29,372 34,119 60,254 80,883 38,109 Domesti c(2) ...... 23,298 23,623 28,829 24,417 70,701 29.318 – Privatisation receipts ...... 887 1,972 13,246 5,538 25,138 300 –Borrowing ...... 20,617 20,742 17,039 15,012 43,339 (3) 29,018 (4) – Direct credit ...... 0 0 0 3,000 00 – Other ...... 1,795 909 (1,456) 866 (2,224 )0
Notes: (1) Figures reflect the 2010 budget law as revised on July 2010. (2) Refers to financing raised in the Albanian market. (3) Includes an amount originally intended to be financed domestically, but was eventually financed by the €192.6 million Syndicated Loan. (4) 2010 budgeted domestic borrowing m ay be adjusted following the issuance of the Notes . Source: Ministry of Finance
67 TAXATION
Albania A16.4(a) The following is a summary of tax consequences of issue and redemption of the Notes for both non-residents and residents of Albania pursuant to applicable Albanian tax legislation.
The following summary is included for general information only. Prospective investors should consult their own tax adviser as to the tax consequences under the laws of Albania of the acquisition, ownership and disposition of the Notes. Such laws and regulations are subject to change or varying interpretations, possibly with retroactive effect. As with other areas of Albanian legislation, tax law and practice in Albania is not as clearly established as that of more developed jurisdictions. It is possible, therefore, that the current interpretation of the law or understanding of the practice may change or, that the law may be amended with retroactive effect. Accordingly, it is possible that payments to be made to Noteholders could become subject to taxation, or that tax rates currently in effect could be increased, in ways that cannot be anticipated as at the date of this Prospectus.
Tax on Issue of the Notes No stamp, registration or state duty or similar tax is payable in Albania upon the issue or transfer of the Notes.
Tax exemption under the Law No. 10267, dated 15 April 2010 “On The Ratification of the Mandate Agreement between the Republic Of Albania and Deutsche Bank AG, London Branch and J.P. Morgan Securities Ltd, as Lead Managers in the Transaction for the Issue of Euro Bonds and Approval of Other Transaction Documents”
The Kuvendi enacted Law No. 10267, dated 15 April 2010 “On the Ratification of the Mandate Agreement Between the Republic of Albania and Deutsche Bank AG, London Branch and J.P. Morgan Securities Ltd, as Lead Managers in the Transaction for the Issue of Euro Bonds and Approval of Other Transaction Document s”. Under Article 5 of this law, Noteholders are exempted from Albanian Income Tax under the Albanian Income Tax Act (Law No. 8438, dated 28 December 1998, as amended) in relation to the issue and trading of the Notes. Accordingly , there will be no withholding tax chargeable in respect of the Notes.
Gross-Up Obligation If at any time the tax exemption explained under the heading above is not applicable (e.g. due to a change of legislation) the gross-up provisions pursuant to Condition 7 of the Terms and Conditions of the Notes will be invoked.
Value Added Tax Under Article 21 of the Albanian Value Added Tax Act (Law No. 7928, dated 27 April 1995, as amended) and the provisions of the Minister of Finance Value Added tax Instruction (No. 17, dated 13 May 2008, as amended), any transaction related to the Notes is exempt from Value Added Tax in Albania.
EU Savings Directive Under EC Council Directive 2003/48/EC on the taxation of savings income, each Member State is required to provide to the tax authorities of another Member State details of payments of interest or other similar income paid by a person within its jurisdiction to, or collected by such a person for, an individual resident or certain limited types of entity established in that other Member State; however, for a transitional period, Austri a and Luxembourg may instead apply a withholding system in relation to such payments, deducting tax at rates rising over time to 35 per cent. The transitional period is to terminate at the end of the first full fiscal year following agreement by certain non-EU countries to the exchange of information relating to such payments .
68 A number of non-EU countries and certain dependent or associated territories of certain Member States have adopted similar measures (either provision of information or transitional withholding) in relation to payments made by a person within its jurisdiction to, or collected by such a person for, an individual resident or certain limited types of entity established in a Member State. In addition, the Member States have entered into provision of information or transitional withholding arrangements with certain of those dependent or associated territories in relation to payments made by a person in a Member State to, or collected by such a person for, an individual resident or certain limited types of entity established in one of those territories.
On 13 November 2008 the European Commission published a proposal for amendments to the Directive, which included a number of suggested changes which, if implemented, would broaden the scope of the requirements described above. The European Parliament approved an amended version of this proposal on 24 April 2009. Investors who are in any doubt as to their position should consult their professional advisers.
69 SUBSCRIPTION AND SALE
Deutsche Bank AG, London Branch, J.P. Morgan Securities Ltd., Alpha Bank A.E., Banca IMI S.p.A., and Banka Kombetare Tregtare SH.A. (together, the “Managers”) have, in a subscription agreement dated 2 November 2010 (the “Subscription Agreement”) and made between the Issuer and the Managers upon the terms and subject to the conditions contained therein, jointly and severally agreed to subscribe for the Notes at their issue price of 99.496 per cent. of their principal amount. The Managers are entitled in certain circumstances to be released and discharged from their obligations under the Subscription Agreement prior to the closing of the issue of the Notes.
United States of America The Notes have not been and will not be registered under the Securities Act and are subject to U.S. tax law requirements. Subject to certain exceptions, Notes may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons. Each of the Managers has agreed that, except as permitted by the Subscription Agreement, it will not offer, sell or deliver the Notes within the United States or to, or for the account or benefit of, U.S. persons. In addition, until 40 days after commencement of the offering, an offer or sale of Notes within the United States by a dealer whether or not participating in the offering may violate the registration requirements of the Securities Act.
United Kingdom Each Manager has further represented, warranted and undertaken that:
(a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of the Notes in circumstances in which Section 21(1) of the FSMA does not apply to the Issuer; and
(b) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom.
Italy The offering of the Notes has not been registered pursuant to Italian securities legislation and, accordingly, each Manager has represented and agreed that it has not offered or sold, and will not offer or sell, any Notes in the Republic of Italy in an offer to the public, and that sales of the Notes in the Republic of Italy shall be effected in accordance with all Italian securities, tax and exchange control and other applicable laws and regulations.
Any offer, sale or delivery of the Notes or distribution of copies of this Base Prospectus or any other document relating to the Notes in the Republic of Italy must be:
(a) made by investment firms, banks or financial intermediaries permitted to conduct such activities in the Republic of Italy in accordance with Legislative Decree No. 385 of 1 September 1993, Legislative Decree No. 58 of 24 February 1998 and, CONSOB Regulation No. 16190 of 29 October 2007 (in each case, as amended) and any other applicable laws and regulations; and
(b) in compliance with any other applicable notification requirement or limitation which may be imposed by CONSOB or the Bank of Italy.
General No action has been or will be taken in any jurisdiction by the Managers or the Republic of Albania that would permit a public offering of the Notes, or possession or distribution of this Prospectus or any other offering or publicity material relating to the Notes, in any country or jurisdiction where action for that purpose is required. Each Manager has represented, warranted and agreed that it has, to the best of its knowledge and belief, complied and will comply with all applicable laws and regulations in each country or jurisdiction in
70 which it purchases, offers, sells or delivers Notes or possesses, distributes or publishes this Prospectus or any other offering material relating to the Notes. Persons into whose hands this Prospectus comes are required by the Issuer and the Managers to comply with all applicable laws and regulations in each country or jurisdiction in which they purchase, offer, sell or deliver Notes or possess, distribute or publish this Prospectus or any other offering material relating to the Notes, in all cases at their own expense.
71 GENERAL INFORMATION
Authorisation A13.4.12 The Issuer has obtained all necessary consents, approvals and authorisations in the Republic of Albania in connection with the issue and performance of the Notes. The issue of the Notes was authorised pursuant to Albanian Law No. 10267, dated 15 April 2010 “ On the Ratification of the Mandate Agreement Between the Republic of Albania and Deutsche Bank AG, London Branch and J.P. Morgan Securities Ltd, as Lead Managers in the Transaction for the Issue of Euro Bonds and Approval of Other Transaction Documents ”, which came into effect on 16 April 201 0 as amended by Law No. 10276 dated 6 May 2010, which came into effect on 10 May 2010 and by Law No. 10336 dated 21 October 2010, which came into effect on 22 October 2010 .
Legal and Arbitration Proceedings A16.6.1 There are no governmental, legal or arbitration proceeding s (including any such proceedings which are pending or threatened, of which the Issuer is aware ) which may have, or have had during the 12 months prior to the date of this Prospectus, a significant effect on the financial position of the Issuer.
Significant/Material Change A16.5.1 There has been no significant change in the tax and budgetary systems, gross public debt, foreign trade and balance of payments, foreign exchange reserves, financial position and resources and income and expenditure figures of the Issuer sinc e 31 December 2009 .
Documents on Display A16.8 Copies of the following documents (together with English translations thereof) may be inspected during normal business hours at the offices of Deutsche Bank AG, London Branch at Winchester House, 1 Great Winchester Street, London EC2M 2PP, United Kingdom for 12 months from the date of this Prospectus:
(a) the Fiscal Agency Agreement which includes the forms of the Temporary Global Note, the Permanent Global Note and the definitive Notes;
(b) the Deed of Covenant;
(c) English translation s of Albanian Law No. 10267, dated 15 April 2010 “ On the Ratification of the Mandate Agreement Between the Republic of Albania and Deutsche Bank AG, London Branch and J.P. Morgan Securities Ltd, as Lead Managers in the Transaction for the Issue of Euro Bonds and Approval of Other Transaction Documents ” and Law No. 10276, dated 6 May 2010 and Law No. 10336 , dated 21 October 2010, authorising the issue of the Note s; and
(d) the budget of the Issuer for the current fiscal year.
Yield A13.4.10 On the basis of the issue price of the Notes of 99.49 6 per cent. of their principal amount, the yield of the Note s is 7.62 5 per cent. on an annua l basis.
Legend Concerning US Persons The Notes and any Coupons appertaining thereto will bear a legend to the following effect: “Any United States person who holds this obligation will be subject to limitations under the United States income tax laws, including the limitations provided in Sections 165(j) and 1287(a) of the Internal Revenue Code ”.
ISIN and Common Code A13.4.2 The Notes have been accepted for clearance through Euroclear and Clearstream, Luxembourg. The ISIN is XS055479267 0 and the common code is 05547926 7.
72 INDEX OF DEFINED TERMS
€...... ii KfW ...... 31 AFSA ...... 53 Kuvendi ...... ii Agency Agreement ...... 7 lek ...... ii Albania ...... i leke ...... ii ALL ...... ii London Stock Exchange ...... i Anti Mafia Law ...... 53 LSI ...... 23 Assembly ...... ii Managers ...... 66 Bank of Albania Law ...... 48 Member State ...... ii business day ...... 10 Money Laundering Law ...... 53 Calculation Amount ...... 8 Noteholders ...... 4, 7 CEB ...... 47 Notes ...... i, 7 CEFTA ...... 38 OFID ...... 47 Clearstream, Luxembourg ...... i PACE ...... 24 Closing Date ...... i Parliament ...... ii control ...... 14 Paying Agents ...... 7 Couponholders ...... 7 Permanent Global Note ...... i Coupons ...... 7 Permitted Security Interest ...... 7 CPI ...... 33 Power Sector Law ...... 32 CPS ...... 31 PPI ...... 33 Day Count Fraction ...... 8 Proceedings ...... 17 Debt Management Strategy ...... 42 Project Financing ...... 8 Deed of Covenant ...... 19 Prospectus Directive ...... i Definitive Notes ...... 19 Public External Indebtedness ...... 8 Dispute ...... 16 public sector instrumentality ...... 14 dollars ...... ii Rate of Interest ...... 8 DPA ...... 22 Regular Period ...... 8 EBRD ...... 46 Regulation S ...... i ERA ...... 31 Relevant Coupons ...... 9 EUR ...... ii Relevant Date ...... 10 Euroclear ...... i Republic ...... i euros ...... ii Reserved Matter ...... 13 Event of Default ...... 11 reverse repo ...... 48 Extraordinary Resolution ...... 14 second currency ...... 16 FDI ...... 41 Securities Act ...... i first currency ...... 16 Security Interest ...... 8 Fiscal Agent ...... 7 SPA ...... 23 FSA ...... i Stabilising Manager ...... ii FTAs ...... 38 Subscription Agreement ...... 66 Government ...... ii Subscription and Sale ...... i Guarantee ...... 12 Syndicated Loan ...... 42 IBRD ...... 47 TARGET System ...... 9 IDB ...... 47 Temporary Global Note ...... i IMF ...... 46 TSE ...... 54 INSTAT ...... 26 US$ ...... ii Interest Payment Date ...... 8 Written Resolution ...... 14 Issue Date ...... 8 Issuer ...... i, 7
73 ISSUER A16.3.1 Republic of Albania A16.3.2 Ministry of Finance Blv. “Deshmoret e Kombit”, NR 1 Tirana, Albani a
FISCAL AGENT AND PAYING AGENT A13.5.2
Deutsche Bank AG, London Branch A13.4.4 Winchester House 1 Great Winchester Street London EC2M 2PP United Kingdom
LEGAL ADVISERS A13.7.1
To the Issuer as to English law: To the Issuer as to Albanian law: White & Case LLP State Advocate of Albania 5 Old Broad Street Blv, Zog 1, Ministria e Drejtesise London EC2N 1DW Tirana, Albania United Kingdom
To the Managers as to English law: To the Managers as to Albanian law: Clifford Chance LLP Wolf Theiss 10 Upper Bank Street Eurocol Business Center Canary Wharf Murat Toptani Street London E14 5JJ 4th Floor, Tirana United Kingdom Albania
74 sterling 131741