Dominic Swire in Prague -

While western markets and economies have been dropping like flies as the financial crisis deepens, the small Balkan state of Albania has not only avoided most of the trouble, it has also been rapidly reforming its own economy.

It's not often that the underdevelopment of capital markets can be regarded as an asset, but in Albania's case it's one of the main factors that has helped shield the country from the economic chaos spreading around the globe. "There does not appear to be any imminent risk for the Albanian banking sector from the international financial crisis," World Bank Country Manager for Albania, Camille Nuamah told bne.

Total foreign exposure is limited and bank capitalization along with liquidity in the system is high, she points out. Although there may be a moderation in credit growth due to the fact that 95% of its banking sector is foreign owned, this is not likely to hinder the country's economic progress. Any such change "would be in line with the efforts of supervisory authorities to temper the domestic credit expansion," she reassured.

In the meantime, Albania's reform-minded government of Prime Minster Sali Berisha has been implementing some major reforms that have earned the small Balkan nation some rare kudos.

Second-fastest reformer

In the World Bank's latest annual "Doing Business" report that measures business regulation in 181 countries, Albania rocketed up the rankings from 135th last year - the worst country in the Balkans by some way - to a dizzying 86th. The rapid rise makes Albania the second-fastest reforming country in the world, and places it above all its Western Balkan peers, including EU member Greece, which languishes in 96th.

The report identifies the creation of a public credit registry, easing the process of starting a business and the lowering of corporate income tax from 20% to 10% as some of the main reasons for the country's progress. On top of this, the report highlighted new laws introduced to strengthen investor protection as one of the three boldest reforms made by any country in the world over the last year.

Albania received further accolades in another report published this year by the Canadian think-tank Economic Freedom Network. Its report, titled "Economic Freedom of the World," measures the openness of 141 economies globally, and ranked Albania in 65th position ahead of all the other Western Balkan nations bar Montenegro in 58th position.

The cherry on the cake came in April this year when Albania was invited to join Nato. Along with the prestige and security that membership of the military alliance brings, one other benefit was a further incentive for reform. "Nato entry was very significant," says Raiffeisen's Albania analyst Martin Stelzeneger. "The last few years during membership negotiations one could see many reforms going through."

One of the main driving forces of this process was US President George Bush's visit in the summer of 2007. "It was very funny," chuckled Stelzeneger. "A lot of infrastructure was improved purely because he was visiting. The new airport in Tirana was finished just months before he came."

These successes are all the more notable given the recent history of the country. For 50 years after the World War II, Albania was isolated under the iron rule of communist leader Enver Hoxa. Since then, it has had to deal with acute poverty and economic devastation following the collapse of several huge pyramid schemes in the mid-1990s.

Major challenges ahead

The rapid change that the country has experienced since those dark days are all the more evident to ordinary Albanians on the street. "Things have changed a lot during the last five years," says Jonida Pupa, coordinator at an underground construction company in Tirana. "There are new business centres, buildings, schools, clubs, bars and restaurants being built everywhere."

The progress is reflected by an increase in the number of foreign tourists visiting the country, which shot up 23% on year in the first half of 2008, according to official statistics. Albania appears to be on a charm offensive having produced a 500-page tourist book along with advertisements airing on CNN.

Nevertheless, all this can't hide the fact that Albania still has some major problems it needs to face if it is to continue its policy of reform. Poverty remains a serious problem, with 48% of the population living on less than $4 a day, according to figures from the UN Development Programme. Power cuts are still common because of the country's aging energy infrastructure, and corruption is still rife.

Despite an improvement of 20 places in Transparency International's 2008 corruption index from the previous year, the country still remains in a relatively low 86th position. This "clearly demonstrates that corruption remains a serious challenge in Albania," the anti-graft agency said in a statement published in September.

If these problems are ever to be addressed, Albania needs as much encouragement as possible to maintain its desire for reform and gain the international credibility it has been striving after so many years. Coming up smelling of roses after the credit crunch passes can only help this process.

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