Albania's economy: what a country does after it loses its savings

How the pyramid schemes swallowed Albania's savings

When central planning ended in 1991, Albania was the poorest and most isolated country in Europe, cut off for four decades by a dictatorship that had abolished almost all private property. The turn to a market economy was quick. Prices and the exchange system were freed, most agriculture, state housing and small industry were privatised, annual inflation fell from 25% in 1991 towards zero, and the lek steadied.

Financial reform was the part that did not follow. Three state banks held 90% of deposits, carried growing portfolios of bad loans, and sat under credit ceilings imposed by the Bank of Albania that stopped them lending. Private banks were few. The demand for credit found an informal market built on family ties and financed by money sent home from Greece and Italy, and beside the lenders sat deposit-taking companies that invested on their own account. Three of the largest, VEFA, Gjallica and Kamberi, had traded since 1992 and held real assets. They were also widely believed to be paying their returns out of smuggling goods into the former Yugoslavia in breach of United Nations sanctions.

Those sanctions were suspended at the end of 1995 and the income went with them. In January 1996 the leading companies lifted their monthly rate from 4 or 5% to 6%, which was close to 100% a year in real terms against inflation of 17%. Parliamentary elections in May pushed it to 8% a month, and new entrants bid it higher still.

Nearly two million people held deposits with Xhafferi and Populli alone, in a country of about three and a half million. Albanians sold houses to buy in and farmers drove their livestock to market to do the same. One resident quoted by the IMF said that Tirana in the autumn of 1996 smelled and sounded like a slaughterhouse. By November the face value of the schemes' liabilities had reached 1.2 billion dollars. The finance ministry gave the public no warning until October 1996, and the warning it gave separated companies with real investments from pure pyramid schemes, a distinction the IMF later called false and misleading. A committee appointed in November to investigate never met. On 19 November 1996 Sude missed a payment.

Why the collapse took the state down with it

Sude's default stopped the flow of new money and the rest followed. Sude and Gjallica declared bankruptcy in January 1997 and the rioting began. The government froze the bank accounts of Xhafferi and Populli, which held 250 million dollars between them, about 10% of GDP, and the Bank of Albania capped daily withdrawals on its own initiative so the surviving companies could not empty their accounts. Parliament banned pyramid schemes in February 1997 without defining what one was, and moved against none of the largest firms.

By March 1997 the government had lost the south. Soldiers and police deserted, about a million weapons were taken from the armouries, foreign nationals were evacuated, and the government resigned. Some 2,000 people were killed, by the IMF's count. Output fell by roughly 7% over the year, most of it from production stopped during the disorder. Customs posts and tax offices were burned and revenue collapsed with them. The lek lost 40% against the dollar by the end of June, prices rose 28% in the first half of the year, and recorded imports fell by more than a quarter. The political sequence ran on from there through a multinational intervention to a new constitution in 1998.

Two decisions kept the damage from compounding. The interim government refused to compensate depositors, which held the fiscal cost of the collapse at nothing and made stabilisation possible. And a law passed in July 1997, drafted with the IMF and the World Bank, handed the schemes to foreign administrators from international accounting firms with power to sell assets, dismiss managers and trace money abroad. Those administrators took up their duties in November 1997, the owners fought them in the courts and threatened them with violence, and full control of every company arrived only in March 1998. By then most of what was liquid had gone.

The IMF's own assessment afterwards was that the long-term economic effects were likely to be limited, because wages and prices in Albania were flexible enough for real public sector pay to be cut in 1997 by leaving nominal pay unchanged. The social damage was the part it called lasting: the deaths, and the thousands impoverished either by their own investments or by the destruction of their property in the violence.

What grew back after the savings went

The economy regained its 1989 level by the end of the 1990s, and the recovery that followed was financed from outside. Personal remittances were worth 15.81% of GDP in 2005 on World Bank figures, fell to a low of 8.34% in 2012, and stood at 9.14% in 2015. In 2024 they came to 1 billion euros. Foreign direct investment ran alongside them at 1.6 billion euros in 2024, and between 2014 and the third quarter of 2024 the largest single sources were the Netherlands with 1.90 billion euros, Switzerland with 1.89 billion, Italy and Turkey with 1.07 billion each, and Austria with 601 million.

Measured output rose with it. GDP at current prices was 12.3 billion dollars in 2012 and 23 billion dollars in 2023, and the World Bank reclassified Albania as an upper-middle-income country in 2011. Convergence has been slower than the growth rate suggests. GDP per head at purchasing power parity stood at 32.35% of the EU-28 average in 2015, and the IMF still put income per head at about a third of the European Union level in its 2025 Article IV consultation.

A large share of the economy is not measured at all. Estimates of the informal share of GDP between 1996 and 2012 range from 13.6% to 37.8% depending on the method, the highest coming from electricity consumption and the lowest from the simple currency ratio. Official figures for output per head understate living standards for the same reason they understate the tax base.

The other thing that grew was the exit. The 2023 census counted 2,402,113 people against 2,821,977 in 2011, and population growth was measured at minus 1.2% in 2025. The IMF names a sharper than expected fall in the working age population as one of the main domestic risks to Albanian growth, because it feeds labour shortages, wage pressure and inflation at the same time.

Why Albania sells services rather than goods

Albania exports about five times as much in services as in goods, and the gap is widening. In 2025 exports of services were worth 31.27% of GDP and exports of goods 5.78%, on the semi-final national accounts published by INSTAT. Services exports grew 10.89% in real terms that year while goods exports fell 7.84%.

Almost all of that difference is tourism. Total exports reached 9.1 billion euros in 2024, up 11% on the previous year, of which tourism revenue alone was 5 billion. International arrivals ran at 6.4 million in 2019, fell to 2.7 million in 2020, and reached 11.7 million in 2024 on UN Tourism figures, which is more than four arrivals for every resident counted in the 2023 census. Receipts followed: 2.5 billion dollars in 2019, 1.1 billion in 2020, 4.5 billion in 2023. Accommodation and food service activities rose from about 2.9% of GDP in 2019 to 4.2% in 2023.

What the country manufactures has been shrinking against that. Industry was 10.08% of gross value added in 2025 and fell 3.72% in real terms; manufacturing alone was 6.46% and fell 1.41%. The textile industry, which grew on subcontracting for European Union firms, had an annual turnover of around 1.5 billion euros and annual growth of 5.3% as of 2016, and cement is the other manufacturing investment of any scale, at the Antea plant at Fushë-Krujë. Italy was the largest destination for Albanian goods in 2014 and the largest source of imports in 2019 at 28%, ahead of Greece at 12%, China at 11%, Turkey at 9% and Germany at 5%. China had already become Albania's single largest trading partner by March 2016, with 7.7% of total international trade.

What is left of Albanian farming

Agriculture, forestry and fishing produced 14.59% of gross value added in 2025 and shrank by 2.50% in real terms, taking 0.38 percentage points off national growth. The share of people the sector occupies is far larger than the share of output it produces: the environmental performance review of Albania published by the UNECE in 2021 put agricultural employment at about 41% of the labour force against about 25% of GDP on its own accounting.

The reason lies in how the land was handed out. Privatisation in the early 1990s created about 470,000 small family farms with holdings averaging roughly 0.7 hectares, and in hilly and mountainous districts some parcels are as small as 0.2 hectares. About a quarter of the country's surface is farmed. Holdings of that size support subsistence and a small surplus. They do not support machinery, and the sector runs instead on family labour, fragmented plots and property titles that are often unclear.

Wine is the oldest of these trades. The region has grown vines since antiquity, and Pliny ranked Illyrian wine third among all wines and called it very sweet, the planted area reached some 20,000 hectares under communism, and production was estimated at 17,500 tonnes in 2009. Families still grow grapes in their gardens for wine and rakia, which is a fair description of how much of Albanian agriculture works.

Where the power and the ore come from

Albania and Paraguay are the only two countries whose electricity production depends entirely on hydroelectric power. Hydro supplied 99.4% of generation in 2021, a year in which the country produced 5.31 billion kilowatt hours and consumed 6.51 billion, importing the difference. A dry year is therefore a fiscal event as much as a hydrological one, and the rainfall on the mountains is an input to the budget.

Diversification has begun and is small. A 140 megawatt solar park at Karavasta, covering 200 hectares and operated by Voltalia, started up in December 2023. An auction in 2023 awarded 222.48 megawatts of onshore wind. Work began in December 2023 on a 400 kilovolt interconnector to North Macedonia, and the Trans Adriatic Pipeline, operational since 2020, crosses the country for about 215 kilometres onshore and 37 kilometres offshore.

Underground, the oil sits in two heavy-crude fields on the coastal plain, Patos-Marinzë and Kuçovë. Crude output was more than 1.2 million tonnes in 2013, of which 1.06 million came from Bankers Petroleum of Canada. Affiliates of China's Geo-Jade Petroleum paid 384.6 million euros in March 2016 for the drilling rights to the Patos-Marinzë and Kuçovë fields. Chromium is the other thing sold abroad out of the ground, and the country also mines copper, nickel and coal, with the Bulqizë, Batra and Thekna mines still working.

That is where the foreign money has gone. Between 2014 and the third quarter of 2024, electricity, gas and water supply took 22.1% of all foreign direct investment inflows and mining and quarrying took 21.3%. Extraction and utilities together account for more than two fifths of the investment that entered the country over that decade.

Why construction is where the risk sits

Construction was 12.56% of GDP in 2025, grew 4.11% in real terms and contributed half a percentage point to growth. Real estate activities were 5.36% of GDP and grew 8.26% in real terms, which outpaced every private-sector activity in the national accounts that year. Real estate took a further 9.9% of foreign direct investment inflows between 2014 and the third quarter of 2024.

That is also where money nobody can trace goes. The 2025 International Narcotics Control Strategy Report of the United States Department of State found criminal proceeds in Albania being laundered through real estate purchases, construction projects, virtual assets and business development. The 2025 Global Organized Crime Index described the construction sector as heavily infiltrated by illicit funds, and named real estate, tourism and construction as the sectors used to legitimise criminal profits. Reuters reported in 2025 that Albania is regarded as a hub for gangs laundering billions of euros from drug and weapons trafficking, and connected it to the luxury vehicles and the new but frequently empty apartment blocks in Tirana. The European Commission put the illegal drug trade at 2.6% of the Albanian economy in 2016 and 2017, against a range of 0.07 to 0.19% in France, Italy, Germany and the United Kingdom.

The supervisory answer is the one that was missing in 1996. Albania came off the Financial Action Task Force grey list in 2023. The Bank of Albania raised the countercyclical capital buffer for the first time in 2024, holds every bank at the maximum capital conservation buffer of 2.5%, and in June 2025 introduced borrower-based limits on new residential mortgage lending. Licensing rules for foreign exchange bureaus were tightened in 2025 around the reputation and identity of beneficial owners. The IMF's 2025 assessment still asks for better data on commercial real estate lending, warns that rapid growth in property lending needs watching, and objects that recent relaxations of capital rules for strategic transport infrastructure loans depart from international standards. Credit to the private sector grew 15.7% in 2024 and 14% in the third quarter of 2025.

What the country owes and what it holds

Public debt stood at 53.8% of GDP at the end of 2024 and the budget deficit at 0.7%. The IMF projects debt falling to 52.7% in 2025 and to 48.7% by 2030. External debt was 40.6% of GDP in 2024, the Bank of Albania's foreign exchange reserves were close to 7 billion euros, about seven months of imports, and the current account deficit was 2.5% of GDP in 2024 with 2.8% projected for 2025.

The banking system is in better condition than at any point since the crisis it came out of. Capitalisation is around 20%, and the ratio of non-performing loans fell close to 4.0% in 2024, the lowest since 2008. Inflation averaged 2.2% in 2024 against 4.8% in 2023. The Bank of Albania cut its policy rate to 2.5% in July 2025 from 3.25% at the start of 2024, and bought about 914 million euros of foreign currency during 2024 to slow the appreciation of the lek. Unemployment fell to 8.8% in 2024, the lowest recorded, and the World Bank measured 8.7% in the first quarter of 2025 with an employment rate of 69.5% among those aged 15 to 64.

The payments system is being rebuilt at the same time. Albania joined the Single Euro Payments Area on 21 November 2024, and from 7 October 2025 Albanian citizens and businesses have been able to make cross-border euro transfers with the forty member countries, a change expected to save around 20 million euros in its first year. The AIPS Euro settlement system, running since January 2022, has saved the domestic market about 140 million euros. Cheap electronic payments are an instrument against informality as much as a convenience, which is why the central bank counts them as one.

Real growth was 3.66% in 2025 after 4.03% in 2024, and the IMF expects 3.5% in 2025 and 3.6% in 2026 while the government aims at European Union membership by 2030. The structural problem is the one the pyramid schemes exposed rather than created. Albania's money still arrives from outside, as tourist receipts, remittances and foreign investment, and it passes through sectors that take cash and build things. What is under construction now, mortgage rules, payment rails, bank supervision and a tax base that reaches the informal half of the economy, is the institution that was absent when two million people handed their savings to Xhafferi and Populli.