Open Data Albania is analyzing causes and prospects for the increase in the overall level of prices and costs in Albania, as well as production, export or final consumption prices. To this end, we are listing external and internal factors for  influencing rising costs because, in addition to market embargoes due to the Russian Federation’s Aggression against Ukraine, there are also factors associated with domestic policy. Recent macroeconomic changes in Albania indicate an increase in inflation, otherwise known as the increase in the general level of prices.

Source: Bank of Albania, INSTAT
Comments and Analyses: Open Data Albania

As exemplified by the data, the annual Inflation Rate has started to rise at higher rates from November 2021 onwards, when inflation exceeded the monetary policy target of 3%, evolving to 3.1% compared to November 2020. More specifically, in December 2021 and January 2022 the inflation rose at the rate of 3.7%, in February 2022 rose to 3.9% and continues to rise further, reaching a 5.7% high in March 2022, compared to March 2021 (estimated at 1.2%).

Referring to economic theories, the increase of the general prices level can occur for two main reasons: the decrease in the general level of  national production supply (aggregate supply) or the increase in the demand for national production (aggregate demand). Supply-induced inflation is known as cost-inflation and is seen as one of the worst economic situations, as in addition to rising prices, it is also associated with rising unemployment, while in demand-induced inflation, the opposite is true as unemployment decreases.

Source: Bank of Albania, INSTAT
Comments and Analyses: Open Data Albania

In general, the unemployment rate has increased in 2020 as a result of the Pandemic, from 11.4% to 11.8% and this downwards trend returned after the 1st quarter of 2021. However, the last quarter of the last year marks another turn, as unemployment rate increases from 11.3% third quarter to 11.4%.

The situation encountered in the last quarter of 2021, with the increase in both unemployment and inflation proves that the country is through a  stagflation (the combination of two phenomena simultaneously). The increase in unemployment and inflation also shows that we are dealing with Inflation related to Costs, thus causing the decline in the aggregate supply. Also, the fact that unemployment in the country is measured   through self-declaration is noteworthy, considering that only the number of people registering in the State Employment Agencies are counted as such. Consequently, not registering as unemployed is significant as it is directly related to the trust or distrust in the help these agencies provide and their treatment of individuals with the unemployed status.

Source: Bank of Albania, INSTAT
Comments and Analyses: Open Data Albania

Instead, when analysing the diverging correlation between the inflation and unemployment rates, ie when they move in opposite directions, its to be understood that we are dealing with inflation induced by rising demand. For the period under review, the divergence can be traced from the fourth quarter of 2020 to the third quarter of 2021 period. More specifically, in the fourth quarter of 2020, where as inflation rises unemployment falls.

Meanwhile, after the third quarter of 2021 there is a convergence of the inflation rate with the unemployment rate, which both appear to rise, a situation indicative of cost-inflation (by lack of supply) causing the phenomenon known as stagflation.

Currently, many world economies are battling cost inflation in 2022. Supply induced inflation can be caused by many factors, but it mainly is a result of:

1. Bigger increase in wages then labor productivity,

2. Exchange rate change – devaluation of the country’s currency,

3. Increase in the costs on imported raw materials – imported inflation,

4. Increase in indirect taxes and similar  fiscal measures.

The article will examine factors that have led to the increase in the overall prices level, based on official data. And, since the first factor cited above has not been identified in sch circumstances, the analysis will focus on the remaning three factors.

Factor 2: Exchange rate-international factor

The exchange rate is the price of one unit of Currency (Lek) expressed in terms of another currency, which indicates its strength or weakness. If the Lek depreciates, imports will become relatively more expensive and exports cheaper. The two main currencies used in Albania to conduct foreign trade or imports and exports are the Euro and the US Dollar.

1. Exchange rates with both currencies show a weakening of the local currency Lek, implying an increase in international trade prices in Euro and US Dollars. Referring to the monthly exchange rate data, it emerged that the Lek/US Dollar exchange rate in March 2022 appears to undergo the highest rise in the last 4 years, marking a 5% increase, from 107 ALL/USD in February to 112 Lek/Dollar in March 2022. It signals  the depreciation of the local Lek against the US Dollar, meaning that, in order to buy a dollar you need a larger amount in Lek. For example, if in February 2022 an item cost 1 Dollar, then we would pay 107 Lek, while in March, the same item, because of the changes in the exchange rate, it would cost 112 Lek.

The Lek/Euro exchange rate also appears to experience the highest increase in the last 4 years, with a 1.7% rate higher in March 2022 than the previous month going from 121 Lekë/Euro in February to 123 Lekë/Euro in March 2022.

Source: Bank of Albania, INSTAT
Comments and Analyses: Open Data Albania

2. While the Euro appears stronger in our domestic market, in the international market it has marked a decline. The US dollar and the Euro are the two most traded currencies in the world and EUR/USD is the most traded pair internationally. If we look at the recent fluctuations in the Euro exchange rate with the US Dollar, we notice a weakening of the first. More specifically, in the first week of April 2022, the Euro marks a 1.2% decline in relation to the US dollar compared to the last week of March 2022. So, the Euro, while losing points in international markets, it maintains its position of strength in the Albanian market for several reasons, amongst them the euroization of some market sectors, like the construction market, who is almost 100% euroized.

Source: Bank of Albania, INSTAT
Comments and Analyses: Open Data Albania

Factor 3: Increased costs on imported raw materials (imported inflation) – international factor

This factor directly affects the change in the overall prices level in the country as well. One of the main reasons for the rising costs in international markets is connected to the Russian aggression  in Ukraine, as the blockade in trade and restrictive measures (embargoes and sanctions)  the two countries are met with on products they export, such as: fuels, cereals, wheat, etc. has affected the disruption of international supply and consequently, the increase of respective prices. Open Data has previously published an article on Russian Exports by Commodity Group and its position in the international market.

The following chart presents the changes in the prices of raw materials, which are inputs in the production process such as oil, energy, wheat, cereals, industrial products, etc.

According to international WTI and BRENT stock markets, the price of crude oil is $ 111.43/barrel and $ 106.68/barrel respectively. Compared to April 2021, the WTI indicator has increased by 66.55%, while the BRENT indicator increased by 68.11%. During April, the price of crude oil according to the WTI indicator increased by 14.26% and according to the BRENT indicator increased by 12.54%, as compared to March 2022.

Price increase is also observed in the gas products by about 174.10% compared to a year ago. Gas currently sells for $ 7.28 per MMBtu (British thermal unit).

The price of electricity has also increased significantly, where according to the Hungarian Stock Exchange HUPEX, which is the leading stock exchange in Central and Eastern Europe, the average price for April 2022 is 227.7 Euro/MWh, about 400% higher than in April 2021.

In terms of other goods, during April 2022 there is an increase of 68.95% for wheat and 34.07% for other cereals compared to the same period a year prior. In terms of industrial products, the largest increase is observed for Nickel with about 101.7% higher, compared to the previous year.

Source: Bank of Albania, INSTAT
Comments and Analyses: Open Data Albania

Factor 4: Increase of indirect taxes and similar measures – National Factors (VAT, Excise)

The 2022 Fiscal Package in the country has also played a major role in the cost of production of goods and services, and consequently, in the level of prices. The influencing fiscal changes undertaken in 2022, are mainly changes in the law of VAT and Excise.

First, regarding VAT, the following changes have been applied with an increasing impact on production costs:

1. Treatment with reduced VAT rate of 10 percent of the supply of agricultural inputs, such as: chemical fertilizers, pesticides, seeds and seedlings, in addition to hormones, classified in codes 2937 of the Combined Nomenclature of Goods. Prior to 2022, VAT exemption applied to this category, therefore the legal change would mark a price increase in the abovementioned products, wich would then be transferred to all agricultural products.

2. VAT Exemption for the import of machinery and equipment in order to implement investment contracts with a value equal to or greater than 500 million ALL. Prior to 2022, they were exempt from VAT if the value of investments in this category exceeded ALL 50 million. This fiscal change will expand the taxable base in this category of investments. Consequently, the sectors where these machineries are used would undergo an incrase in production costs, which would again be passed to the final consumer or may lead to a reduced interest in investing in technology for domestic and foreign investors, especially in manufacturing industries.

3. Reducing the VAT compensation rate for agricultural farmers from 6 to 0%. The legal change, applied from 2019 onwards, prevents agricultural  farmers from benefitting from tax incenitives, thus, marking an increase in agricultural products cost.

All products which underwent VAT increase in 2022, are the same affected by the shortage and consequently, the rise in prices in world markets, as a result of embargoes to and from the Russian Federation due to Ukraine’s aggression.

Source: General Directorate of Taxes
Comments and Analyses: Open Data Albania

Regarding the Excise, the following changes, with an increased impact on production costs, have been applied.

Unification of excise duty on oil gases and other gaseous hydrocarbons. Currently, the excise tax on oil gases and other gas hydrocarbons is applied only in case the gas is used as fuel for the vehicle, in the amount of 8 ALL/liter. Meanwhile, with the new legal changes which will be applied starting July 2022,  all consumers, regardless of the way they use gas (ie for both personal and business purposes) will pay an excise tax of 6 ALL/liter. So, gas consumers without distinction will now face an additional tariff of 6 ALL/liter.

The abolition of excise duty reimbursement, on fuels consumed in heated greenhouses, for the production of industrial and agro-industrial products, which are used in technological production processes (in pharmaceuticals, for bricks, cement, beer and crude oil production),  thus, increasing their production costs.

The indexation of the excise level, based on the price increase index. As the excise does not reflect the change in the consumer price index, it has been decided that starting from January 2022, the indexation based on the annual inflation rate will be applied every year on excise tariffs. This automatically increases the cost of production and consequently, that of consumption.

Source: General Directorate of Taxes
Comments and Analyses: Open Data Albania

Some other tax changes that affect the final price that consumers pay are: the imposition of a national tax on powder milk(100 ALL/kg), on whey (150 ALL/liter), on homogenized beverages (16 ALL/liter) and for milk cream (150 ALL/liter).

Meanwhile, you can consult the possible effects of the Liberalization of Electricity Supply for Businesses (not small businesses), presented in the Price of Electricity Supply for Businesses 2015 – 2022 article.

The data used for the purposes of this research were obtained from the institutions responsible for reporting the indicators under examination, such as the Bank of Albania, the Institute of Statistics, the Albanian Parliament, Trading Economics and the HUPEX Energy Exchange databases. For more information about the concrete calculations, please refer to the Excel below.

Download excel: Basic Consumption and Production Costs: External and Internal Factors influencing rising costs, March and April 2022
Comments and Analysis: Open Data Albania
Translated by: Rezarta Caushaj