SEC (2005) 1421

Albania 2005 Progress Report {COM(2005) 561 final} {COM(2005) 553 final}

A. INTRODUCTION 3

1. PREFACE 3

2. RELATIONS BETWEEN THE EU AND ALBANIA 4

B. IMPLEMENTATION OF THE STABILISATION AND ASSOCIATION PROCESS 8

1. POLITICAL SITUATION 8

1.1 Democracy and the rule of law 9

1.2 Human rights and the protection of minorities 17

1.3 Regional issues and international obligations 22

1.4 General evaluation 23

2. ECONOMIC SITUATION 25

2.1 Economic developments 25

2.2 Progress towards economic stability and competitiveness 27

2.3 General evaluation 34

3. EUROPEAN STANDARDS 35

3.1 Internal market 36

3.1.1. Free movement of goods 36

3.1.2. Movement of persons, services and right of establishment 38

3.1.3. Free movement of capital 39

3.1.4. Customs and taxation 40

3.1.5. Competition 42

3.1.6. Public procurement 43

3.1.7. Intellectual property law 44

3.1.8 Statistics 45

3.2 Sectoral policies 47

3.2.1. Industry and SME 47

3.2.2. Agriculture and fisheries 48

3.2.3 Environment 49

3.2.4. Transport policy 51

3.2.5. Energy 53

3.2.6. Information society and media 54

3.2.7 Financial Control 55

3.2.8 Other policies 56

3.3 Justice, freedom and security 57

3.3.1. Visa, border control, asylum and migration 57

3.3.2. Money laundering 58

3.3.3. Drugs 59

3.3.4. Police 60

3.3.5. Fighting organised crime and terrorism 61

3.4 General evaluation 63

C. EUROPEAN PARTNERSHIP: OVERALL ASSESSMENT 66

STATISTICAL ANNEX 70

INTRODUCTION

Preface

The European Council in Feira in June 2000 confirmed that

“its objective remains the fullest possible integration of the countries of the Western Balkans region into the political and economic mainstream of Europe through the Stabilisation and Association process, political dialogue, liberalisation of trade and cooperation in Justice and Home Affairs. All the countries concerned are potential candidates for EU membership” .

In view of the EU-Western Balkan Thessaloniki Summit in June 2003, the General Affairs and External Relations Council adopted “The Thessaloniki agenda for the Western Balkans: moving towards European integration”[1]. The Thessaloniki agenda strengthened the Stabilisation and Association process by introducing new instruments to support the countries’ reform and European integration efforts, including European Partnerships. This agenda was endorsed by the European Council and by the countries of the Western Balkans in June 2003.

In June 2005, the European Council reiterated that:

“ … each country’s progress towards European integration, taking account of the evolution of the acquis, depends on its efforts to comply with the Copenhagen criteria and the conditionality of the Stabilisation and Association process. Moreover, in this process, regional cooperation and good neighbourly relations will remain essential elements of EU policy.”

The structure of the report is largely the same as that used in previous years and assesses the implementation of the Stabilisation and Association process. The report:

– describes the relations between Albania and the Union;

– analyses the political situation in Albania in terms of democracy, the rule of law, respect for human rights and the protection of minorities;

– assesses the economic situation in Albania in terms of economic developments and progress towards economic stability and competitiveness;

– reviews Albania’s capacity to implement European standards, that is, to gradually make legislation in key policy areas more compatible with European legislation and standards;

– examines the extent to which Albania has addressed the European Partnership priorities.

This report takes into consideration progress since the 2004 report. It covers the period from March 2004 to 30 September 2005. It looks at whether planned reforms referred to in the 2004 annual report have been carried out and examines new initiatives, as well as assessing the overall level of implementation.

Progress has been measured on the basis of decisions actually taken, legislation actually adopted and the degree of implementation. As a rule, legislation or measures which are in various stages of either preparation or Parliamentary approval have not been taken into account. This approach ensures equal treatment for all countries and permits an objective assessment of each country in terms of their concrete progress implementing the Stabilisation and Association process.

The report draws on numerous sources of information. Albania has been invited to provide information on progress made since the publication of the last report. Council deliberations and European Parliament reports and resolutions have been taken into account in drafting the report.[2] The Commission has also drawn on assessments made by various international organisations, in particular the contributions of the Council of Europe, the OSCE, the international financial institutions, and non-governmental organisations.

Relations between the EU and Albania

Recent developments in bilateral relations

Albania is participating in the Stabilisation and Association Process (SAP). Current contractual relations between the Community and Albania are based on the 1992 Trade, Commercial and Economic Co-operation Agreement which should be replaced by the Stabilisation and Association Agreement (SAA) once conditions for its conclusion are met. Parts of the SAA will be implemented through an Interim Agreement until the ratification of the SAA is completed. The EU is Albania’s principal trading partner, and Albania benefits from unilateral trade concessions under the EU’s autonomous trade measures (ATMs). The EU provides guidance to the Albanian authorities on reform priorities through the European Partnership, which is followed up through regular Consultative Task Force meetings. Albania also benefits from substantial EU financial assistance.

The 1992 Trade, Commercial and Economic Co-operation Agreement aims to develop and diversify trade between Albania and the EU, as well as providing a basis for commercial and economic co-operation. A Joint Committee oversees the proper functioning of the agreement, meeting annually, and most recently in May 2005 in Tirana. Five sectoral Working Parties meet annually to monitor developments and reforms in their respective fields and report to the Joint Committee.

Between April 2004 and July 2005, Working Party meetings in Brussels and Tirana covered a wide spectrum of issues: economic and financial matters : macro- and micro-economic development, budgetary, trade, fiscal and monetary issues; infrastructure : transport, environment, water, energy and telecommunications; agriculture and fisheries , including consumer protection; customs and taxation: legislative developments and administrative capacity; harmonisation of legislation : areas of particular importance for SAA negotiations such as intellectual property rights, competition, public procurement, state aid, company law, enterprise policy, accounting, auditing and free movement of goods, services and capital.

Negotiations on a draft Stabilisation and Association Agreement began in early 2003. Since the beginning of March 2004, three official rounds (including Member State representatives) and five technical rounds of negotiations have been held with the Albanian authorities on the draft agreement. Agreement in principle has now been reached on most elements of the text of the draft agreement. However, in his letter of April 2005 to the former Prime Minister, the Commissioner Rehn made clear that Albania would need to ensure the proper conduct of the 2005 parliamentary elections and tangible achievements on European Partnership priorities in the fields of rule of law, land ownership, human rights, media freedom and customs before the Commission could recommend the conclusion of the agreement.

A European Parliament-Albania inter-parliamentary meeting took place in Brussels in November 2004. Issues discussed included the political and economic situation in Albania, focusing in particular on electoral law, property law and on fighting organised crime. Contacts with the European Economic and Social Committee regarding Albania have taken place on an ad-hoc basis during the reporting period.

The Council decision for the adoption of the European Partnership for Albania was published in June 2004 ( see part C – European Partnership: Overall Assessment ). Albania adopted its Action Plan for the Implementation of European Partnership Priorities in September 2004 and provided the Commission with updates on its progress in implementing the Action Plan in December 2004 and March 2005.

Since March 2004, five Consultative Task Force meetings have been held with Albania. The meetings have focused on key European Partnership priorities: fighting organised crime, preparing the 2005 parliamentary elections, respect of human rights by law enforcement bodies, land restitution/compensation, freedom of expression and media, minority rights, migration and public finance management. Each meeting has resulted in a set of agreed recommendations for action by the Albanian authorities.

The EU is Albania’s main trading partner, representing about 74% of Albania’s total imports and around 85% of its total exports. EU exports to Albania grew by 9% from 2003 to 2004, while EU imports from Albania grew by 10.2%, resulting in an increase in Albania’s trade deficit with the EU from about EUR 760 million in 2003 to around EUR 820 million in 2004. The EU primarily imports manufactured products from Albania. Textiles account for approximately 28% of EU imports from Albania, and agricultural products for about 8%. The EU’s main exports to Albania are machinery and other manufactured products, accounting for about 75% of total EU exports. Agricultural products account for 15% of total EU exports. Since April 2004, definitive safeguard measures on imports of preserved citrus fruit have been in place with erga omnes effects, thus also covering Albania. A safeguard investigation on imports of frozen strawberries was opened in July 2005.Albania has benefited from the Community’s Autonomous Trade Measures since September 2000. These measures allow almost all imports originating in Albania to enter the EU without quantitative restrictions and exempt from customs duties. The only exceptions are some beef and fish products, sugar and wine, to which preferential tariff quotas apply. However, to take real advantage of these autonomous trade preferences Albania needs to improve its industrial, sanitary and phytosanitary standards and improve the quality of its production, in particular in the agricultural and fisheries sector. Attracting greater foreign direct investment to improve competitiveness is important and Albania should also use its export promotion agency more strategically, and strengthen its WTO secretariat. Progress in the adoption of EC standards needs to be matched by improved co-ordination and implementation capacity in line ministries.

Community assistance

Over the period 1991-2004 Community assistance to Albania has totalled about EUR 1.2 billion, of which about EUR 635 million was delivered through the Phare programme. Other significant types of assistance have included substantial food and other urgent humanitarian aid, balance of payments support, support to elections via OSCE, the TEMPUS programme of assistance to small projects in the higher education sector, and loans from the EIB.

Between 2000 and 2004 Albania benefited from around EUR 240 million of EU assistance (an annual allocation of about EUR 50 million). Since 2001 CARDS has been the main EC financial instrument for Albania. CARDS assistance, which supports Albania’s participation in the SAP, targets four broad reform priorities: Justice and Home Affairs (about 40% of the funding), Administrative Capacity Building (about 20%), Economic and Social Development (about 35%) and Democratic Stabilisation (about 5%). Management of EC projects has been transferred to the EC Delegation in Tirana, in close cooperation with the Albanian Ministry of European Integration, and the implementation of EC assistance programmes has improved, with the existing backlog gradually being reduced.

The support provided through CARDS in 2005 is mainly focused on European Partnership priorities, which take into account the political and economic situation in Albania and the requirements Albania must fulfil in order to be able to implement an SAA. Total CARDS assistance allocated to Albania in 2005 amounts to EUR 44.2 million. The four main areas of support are:

Democratic Stabilisation (EUR 2.4 million) – to enhance the role of civil society and the media in the European integration process by reinforcing the role of NGOs, trade unions and other civil society organisations, encouraging their involvement in policy debate and policy-making; to meet social challenges by supporting a funding mechanism for the delivery of social services by civil society.

Good Governance and Institution Building (EUR 26.6 million) – to support judicial reform (EUR 3.8 million), to support the Albanian State Police in the fight against organised crime and terrorism, and in ensuring police integrity (EUR 3.0 million); to support the ongoing Police Assistance Mission of the European Commission to Albania (PAMECA) (EUR 7.0 million); to build public administration capacity (EUR 4.3 million), to support decentralisation (EUR 5.5 million); and to improve customs and taxation (EUR 3.0 million).

Economic and Social Development (EUR 14.7 million) – to improve the investment climate (EUR3.2 million); to establish a National Food Authority (EUR 3.0 million); to design and supervise the construction of key road sections (EUR 3.5 million); to treat environmental “hot spots” and to assess the environmental legislation implementation monitoring system (EUR 3.0 million); to implement TEMPUS III (EUR 1.0 million) to promote the development of the Albanian higher education system and to help develop the social insurance system (EUR 1.0 million).

Opening of Community Programmes (EUR 0.5 million). The EU agreed at the 2003 Thessaloniki summit to open participation in Community programmes to the Western Balkan countries, following the model of previous enlargements. A Framework Agreement between the Community and Albania on participation in Community Programmes was signed in November 2004. The Community ratified the Agreement in May 2005, and Albania did so in May 2005. The Albanian financial contribution (‘entry ticket’) required to cover the expenses of its participation in the programmes may be partly paid through the CARDS budget.

Albania also benefits from the regional CARDS programme, which in 2005 has an overall budget of EUR 40.4 million to support actions of common interest for the Western Balkan region, for example in the fields of infrastructure, institution building and cross-border cooperation in conjunction with Interreg activities.

In addition to CARDS assistance, Albania is also a priority country for the European Initiative for Democracy and Human Rights, and benefits from the LIFE environmental programme, as well as from the 6th Framework Programme for Research and Development.

The Commission has prepared a Memorandum of Understanding to grant macro-financial assistance to Albania (up to EUR 25 million: EUR 16 million grant + EUR 9 million loan). The first instalment of EUR 12 million will be released before the end of 2005 following the ratification of the Loan Agreement by the Albanian parliament in September 2005. The release of the macro-financial assistance is associated with the conditions which include improved public finance management with more secure financial circuits, measures to improve the functioning of the public administration and the fight against corruption, and progress in financial sector reform. Albania has fulfilled the necessary conditions to enable the disbursement of the first instalment.

Twinning

One of the main challenges for Albania is the need to strengthen its administrative and judicial capacity. To help Albania to address it, the Thessaloniki Summit decided to extend the “ twinning ” mechanism, which was used successfully during the previous enlargement, to the Western Balkans. “Twinning” makes the Member States’ public sector expertise available to the partner country through the long-term secondment of civil servants and accompanying short-term expert missions and training. The Western Balkans can also draw on Member States’ expertise through “twinning light” (projects of up to six months’ duration). Currently three twinning projects are under implementation in Albania. These projects support the Albanian Border Management Strategy, the Ministry of Finance in the improvement of the Internal Financial Control and the Institute of Statistics. Four more twinning projects are planned to start in 2005.

IMPLEMENTATION OF THE STABILISATION AND ASSOCIATION PROCESS

Political situation

The conditions of the Stabilisation and Association process were set out in the conclusions of the General Affairs Council in April 1997. To become EU members, the countries need to satisfy the criteria established in the Copenhagen European Council conclusions of June 1993. The Copenhagen political criteria stipulate that countries must have achieved “stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities.”

Elements for examination include democratic principles, human rights and rule of law, respect for and protection of minorities and regional cooperation. In addition to these, specific elements of relevance to individual countries are examined, including respect for international obligations such as peace agreements and cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY).

In its 2004 report the Commission found that, overall, Albania’s medium-term interest was often sacrificed to shorter-term, narrower political interests, and that consolidation of democratic culture was essential to bring about necessary reforms. An adverse political climate - tensions between the main political parties and within the Socialist Party which then held power - delayed reform, with the result that many shortcomings identified in previous Reports were not addressed.

Regarding democracy and rule of law , the report concluded that, despite an improved electoral code, the October 2003 local elections displayed serious deficiencies. The ability of the public administration to implement potential Stabilisation and Association Agreement (SAA) commitments remained an issue of concern. While some steps had been taken to improve the functioning of the judicial system, considerable efforts were still necessary to improve law enforcement, in particular as regards serious crime. Public administration reform and the strengthening of civil society had also seen some progress, but the report concluded that more determination and political will was necessary to ensure further improvement. The report found that rule of law in Albania remained weak, with corruption and organised crime considered serious threats to the country’s progress, and that further efforts were needed to ensure full respect of human rights by law enforcement bodies.

On human rights and the protection of minorities , the report noted that while human rights and fundamental freedoms are legally guaranteed, efforts to ensure their enforcement should be further enhanced. The judiciary needed to be better prepared to deal properly with human rights cases. Government attempts to interfere with the media reportedly continued. Some legislative progress had been made on the restitution/compensation of confiscated land through the preparation of new legislation. Albania needed to make further efforts to protect of minority rights, and was called upon in particular to accurately evaluate the size of minorities in Albania, and to improve minority-related legislation so that it supports the implementation of the relevant international conventions ratified by Albania.

As regards regional issues, Albania was reported to have maintained a constructive attitude, with relations with neighbouring countries continuing to improve, including through the effective implementation of the bilateral Free Trade Agreements concluded under the Stability Pact Memorandum of Understanding on Trade Liberalisation and Facilitation. In the multilateral field, the report noted that Albania remained an active member of the Council of Europe (CoE) and OSCE, and contributed to the other key initiatives for regional co-operation in South-East Europe, but that international obligations had not always been met owing to Albania’s general difficulty in implementing and enforcing legislation.

The section below provides an assessment of political developments in Albania since the 2004 report, including the overall functioning of the country’s executive and its judicial system, the rule of law, respect for human rights and protection of minorities and regional issues. Such developments are closely linked to Albania’s ability to implement the reforms and reach the standards that are required in order to make further progress in the Stabilisation and Association process and towards the EU.

Democracy and the rule of law

Parliament

The Assembly of Albania (its unicameral parliament) has 140 members: 100 are elected directly and 40 by proportional representation. The main political parties remain the Democratic Party of Albania (DP) and the Socialist Party of Albania (SP), with a number of smaller parties forming alliances with these parties.

The parliament has remained a real forum for political exchange. Significant changes to its internal organisation have improved its functioning and steps were taken to enhance the coherence of new laws, but a confrontational political atmosphere continued to slow the progress of reform. The parliamentary elections of summer 2005 were lengthy and showed shortcomings, but were conducted in a fundamentally sound manner.

The legislature which ended in May 2005 approved a number of important items of legislation, such as a law on property restitution and compensation, amendments to the electoral code, and a package of laws designed to fight organised crime and terrorism. With the parliament increasingly taking a central place in Albania’s political life and dealing with complex legislative issues, it approved new rules of procedure to render its decision-making mechanisms more effective and transparent. The number of standing parliamentary committees was reduced from thirteen to eight (including the European Integration Committee) and a new procedure was introduced to govern plenary sessions. The transformation of the ad hoc parliamentary committee on European integration into a fully-fledged standing committee should allow the parliament to focus more effectively on the European integration process. The 2004 Report was reviewed by the parliament and a series of parliamentary debates and discussions took place to discuss its findings. The Government also involved the parliament in the process of drafting the Albanian Action Plan to implement the priorities of the European Partnership, although the document did not undergo formal parliamentary approval.

The establishment of Legal Reform Commission has contributed to improving the quality and transparency of the legislative process. This Commission has been assigned the task of ensuring the coherence of new laws with regard to both the Albanian legal system and the European and international legal frameworks, as well as proposing and implementing effective mechanisms to ensure the appropriate levels of public information and participation in the legislative process. The Ministry of Justice has taken steps to enhance the training of legal drafters and relations between the institutions involved in the legislative process, and has issued a manual on law drafting techniques and the legislative process.

The political climate in the parliament remained problematic. Several plenary sessions were held in an overly confrontational atmosphere, with the opposing political camps unable to take a constructive bipartisan approach on important pieces of legislation. Despite the intensification of parliamentary activity, this resulted in several instances of key legislative initiatives being slowed down or stalled.

Parliamentary elections took place in July/August 2005 on the basis of a newly revised Electoral Code. Although lengthy and not without problems, the election was conducted in line with the Electoral Code and adhered to fundamental democratic principles, leading to a smooth transfer of power. The DP and its allies gained a total of 80 seats compared with a total of 60 seats for the SP and other parties, giving the DP and its allies a comfortable working majority. A DP-led government took office in September 2005.

The OSCE/ODIHR Election Observation Mission reported that a number of positive developments characterised the election process: it was conducted in line with an improved electoral code, and in a generally peaceful atmosphere; a wide spectrum of parties and candidates were registered, offering voters a diversity of choices; parties pledged to adhere to a Code of Conduct, which was instrumental in setting campaign standards; media coverage was balanced overall; the Central Electoral Commission and the Electoral College fulfilled their roles transparently and professionally. OSCE/ODIHR nonetheless indicated that a number of issues still have to be addressed, including technical and administrative problems, concerns related to tactical voting, the possible disenfranchisement of a number of students, a lack of improvement in the participation of women in public affairs and, above all, a need to further improve voter lists.

The election’s shortcomings point to a need for further improvement of the electoral laws and practices as well an urgent need for further work on improving the civil registry. If they are to be effective in time to benefit the next set of elections (local elections which should take place in autumn 2006) reforms will have to be implemented considerably more rapidly than was the case for the reforms preceding the 2005 parliamentary elections.

The new legislature provides an opportunity to consolidate the significant progress achieved as regards parliamentary procedure, and most importantly to make further progress in pushing ahead with reforms.

Government

Following a period of instability due to internal quarrelling within the former ruling Socialist Party, the government went through a period of relative political stability. A number of significant new strategies and a new resource planning system were put in place, and the effectiveness of the Ministry of European Integration was improved, but the government did not take full advantage of this stability to move forward on reform issues. The 2005 election campaign, and the ensuing political polarisation, used up a great deal of government energy and slowed reform progress.

The government approved several new strategies, including the National Strategy for Social and Economic Development, the Action Plan for the Implementation of European Partnership Priorities, the National Plan on Approximation of Legislation. The government launched the Integrated Planning System and drafted a considerable amount of new legislation. The government also established an Inter-ministerial Committee for Development of Information Technologies, which will among other things define common standards for IT applications in public administration, and should thus help foster better inter-ministerial co-ordination. The new government now faces the task of ensuring that these strategies are properly implemented and that this is done in a co-ordinated manner. These have proved to be the most problematic aspects of Albania’s reform initiatives in the past, and determined political will is required in order to ensure that these initiatives translate into concrete progress on key reform challenges.

The establishment of a fully-fledged Ministry of European Integration and the subsequent government decision to clarify the ministry’s competences gave this body a central role in Albania’s EU integration process. Since then, the Ministry of European Integration has continued to lead and co-ordinate government activities related to the pursuit of European integration. The ministry underwent internal reform, with the creation of new departments, such as those for the approximation of legislation, analysis and translation. Despite these achievements, more effort must be made to allow the ministry to cope with an ever-growing demand for inter-departmental leadership and coordination. The ministry has not yet been provided with the premises, staff and logistics it needs to fulfil its duties effectively. Newly recruited staff members are generally committed and of a high professional standard, but limited staff numbers restrict the ministry’s capacity to take up training opportunities.

The new government, which took office in September 2005, reduced the number of line ministries from 17 to 14 (amalgamating the old Ministries of Public Order and Local Government to form a powerful new Ministry of the Interior, absorbing the former Ministry of Industry and Energy into a new Ministry of Economy, Industry and Energy and combining the formerly separate tourism and culture sectors under a new Ministry of Tourism, Culture, Youth and Sports.

Albania has made important advances in the management of donor assistance. In order to create a single assistance management strategy with a single point of contact with donors, the Council of Ministers launched the Integrated Planning System (IPS). The system is intended to co-ordinate national and assistance investment resources around an integrated, prioritised and budgeted strategy, which focuses strongly on the European integration agenda, and is in line with medium-term economic possibilities. It is also intended to cover the whole cycle of management of assistance, from strategy and planning, implementation and monitoring, to evaluation, thus integrating a number of functions currently split between various ministries. The IPS aims to allow the government to prioritise its expenditure priorities for the progress of European integration, economic and social development and other political goals, but will require considerable political commitment if it is to be effective.

Public administration

Albania has made progress in improving the oversight, recruitment and training of the civil service and taken steps to enhance its legal framework. Considerable efforts remain necessary to restrict political appointments to the appropriate levels, improve salaries and career structures and introduce performance management to raise the effectiveness of the public administration.

Albania has taken steps to make public administration more robust. Proposed amendments to the Civil Service Law (which provides an overall legal framework for the public services with common principles for all civil servants) were approved by the Council of Ministers in March 2005 to ensure that local government and prefectures - bodies not previously covered - will fall under the law. The amendments also foresee the improvement of recruitment and potential retention of civil servants within the public administration. These amendments remain to be adopted by parliament.

The Department of Public Administration has taken a number of steps to make the recruitment process for civil servants more transparent. It has published vacancies and the results of open competitions on its website, and has drafted a manual on recruitment for ad-hoc recruitment committees in an effort to reduce political interference. While open recruitment practices for the central civil service are gradually becoming accepted, delays and inefficiencies in recruitment can cause staff shortages in crucial areas (such as the administration of justice). Shortcomings of the planned amendments to the Civil Service law include the reduction of the appeal period for appointments, and potential contradictions with the Code of Administrative Procedure.

The number of civil servants trained by the Training Institute of Public Administration (TIPA) is increasing each year. TIPA has made great efforts to improve its external communications and to work more closely with local government. A joint initiative of the Ministry of European Integration, Department of Public Administration and TIPA to provide training relating to the EU is being implemented. TIPA has established a Centre for Fiscal Training to train employees of the General Directorate of Taxation and the General Directorate of Customs. Training for civil servants nonetheless remains predominantly supply-driven: ministries should take greater responsibility for defining training needs and ensuring delivery. A better understanding is needed of the generic management training that all civil servants should undertake in order to do their jobs more effectively, and greater action is required on the part of the Secretaries-General, in conjunction with Ministry human resource departments.

The Civil Service Commission, responsible for oversight of the proper application of laws relating to the civil service, is now beginning to work more effectively. In particular, the role of inspectors is being more carefully defined and their activities better focused on the management of the civil service.

The Albanian civil service remains hindered by a pervasive lack of understanding of the need for, or will to implement, a real separation between the political and administrative levels. Political appointments, down to Director level in most central ministries, are still the norm. Notably, the appointment of Secretaries-General remains political, so the potential role of Secretaries-General - that of translating ideas into policy, and of effective personnel management to ensure effective policy execution and service delivery - is severely compromised. Ministers have often been too involved in the day-to-day running of their ministries, and unwilling to leave such duties to permanent civil servants.

Career prospects in the civil service and other public service remain poor. The small numbers and narrow pyramid of levels within the civil service means that creating a career structure in the central civil service remains very difficult, but in the wider public sector there may be more opportunity to introduce career structures and career planning aimed at retaining the most talented and motivated personnel.

Salary structures are currently under review, with a view to possible adjustment. Salary and reward levels are highly variable across the civil service and in the public sector more generally. There is no single legal framework for the bonus system, rendering it impossible for the Ministry of Finance to properly budget costs. The lack of effective public service unions has contributed to a situation whereby, over time, salaries have become severely differentiated, as the Government has favoured different groups of public servants, or where well-placed heads of institutions are able to press cases for special treatment.

The question of performance management has not yet been adequately tackled. The introduction of results-oriented management involving clear objectives would make a substantial difference to the effectiveness of the civil service. In the first instance, monitoring of the performance of civil servants needs to become the norm.

During 2004, the office of People’s Advocate (Ombudsman) dealt with 3,840 complaints, nearly half of which were found to fall outside the remit of the office. Half of those admitted were resolved in favour of the plaintiff. The most common complaints examined by the office concerned lack of enforcement of court judgements, local government decisions and questions related to social insurance. Thanks to cooperation with the media and with NGOs, public awareness of its functions has increased, but more effort should be made to give this office increased weight in its relations with public institutions.

Judicial system

Albania’s judicial structure comprises a Constitutional Court, a Supreme Court, 6 civilian appeal courts and 29 district courts. Each level deals with civil, criminal, commercial and administrative cases. The High Council of Justice makes proposals to the President on the appointment, transfer and dismissal of judges and deals with judicial discipline.

Albania has made some progress towards improving the functioning of its judicial system, in terms of its organisation and transparency, the functioning of the High Council of Justice, developing legislative tools for criminal and juvenile justice, and training. Implementation of criminal justice nonetheless remains weak; judicial independence should be ensured; enforcement of judgements, while improving, is still low, and transparency should be improved. Higher pay could improve the effectiveness of judicial staff, and improved infrastructure is needed.

The Legal Reform Commission, a new advisory body created by the Minister of Justice, has prepared a study on the reorganisation of Courts of First Instance to improve the efficiency of the judicial system. This assessment takes into account elements such as geographical coverage, population size, workload, and the need for new appointments.

Some progress has been made on improving the way the judicial system is able to address criminal justice, with an “anti-mafia package” introducing new legal tools to facilitate the seizure of the proceeds of crime, and the reduction of the scope of material competence of the Serious Crimes Court, focusing it on offences connected to organised crime. Regional judicial co-operation on fighting organised crime has been fostered by the signature of a memorandum of co-operation between the General Prosecutors of the Western Balkan region, and prosecutors have also undergone training at regional level on financial crimes, special investigative means and witness protection. Care should be taken to further develop the legal framework for witness protection, in such a way as to ensure that the safety of vulnerable witnesses is appropriately balanced with the accused's right of defence.

Despite some positive developments, the proper implementation of the existing legislative framework and the overall effective functioning of the judicial system remain a matter of concern. Efforts are still needed to ensure full access by all citizens to the courts and to increase popular confidence in the judiciary. Co-operation between prosecutors and police and the active and sustained control of the investigation by the prosecutor also need to be strengthened. Enforcement procedures in civil, commercial and administrative cases need to be improved in order to bring Albanian rates of execution of judicial rulings closer to EU standards, particularly in cases where the state is the losing party. While the overall rate of enforcement of judgements has exhibited a positive trend - during 2004 6,050 of a total of 13,329 judgements (45%) were enforced compared with 4,865 of a total of 14,917 (33%) in 2003) - there remains considerable room for further improvement.

The existence of two parallel inspection services for the judiciary, one for the High Council of Justice and another for the Ministry of Justice, with no clear division of competences and responsibilities among them, should be addressed as a matter of urgency. The competence of the Ministry of Justice inspectorate should be restricted to purely administrative matters in order to prevent it being perceived as a threat to the independence of the judiciary. It is questionable whether a judicial inspectorate should exist within the Ministry of Justice itself, given that in Albania it is the Office for the Administration of the Judiciary Budget (OAJB - an autonomous body of the judiciary) rather than the Ministry of Justice which is responsible for administering the budget of judiciary. Albania’s Minister of Justice sits on the High Council of Justice, and although the minister does not have voting rights in disciplinary procedures against judges, he has the power to initiate such procedures. In this context, the principle of judicial independence should be observed.

There has been little progress in fostering the status and independence of judges. The High Council of Justice has enacted a number of regulations aimed at guaranteeing effectiveness and transparency in its internal decision-making procedures. Progress was made in the definition of new principles and rules for the evaluation of the professional performance of judges as the basis of a fair career development system. Objective rules for the transparent assignment of cases to judges have still to be established. The existing legislation for the evaluation of the work of prosecutors is not yet fully implemented and a more transparent and merit-based evaluation system remains to be developed.

Albania’s Magistrates' School further enhanced its capacity to plan and deliver both initial and continuing training of judges and prosecutors, with amendments to the law governing its operation. Although concerns have been expressed regarding the autonomy of the School, particularly with regard to the management of its budget, the amendments introduce some positive changes such as mandatory continuing in-service training for judges and prosecutors, and the taking into account of this training in the High Council’s evaluation of judges’ professional performance. The School has adopted a long-term strategy aimed at ensuring its future sustainability, and the budget of the School has been increased. However, given that donor funding will not be available indefinitely, further steps will be required to ensure the financial sustainability. During the reporting period, all Magistrates’ School graduates were offered positions as judges or prosecutors, consolidating the School as the pre-eminent route for recruitment to the professions. Some progress was made regarding training for the legal profession at the Law Faculties, which have been reviewing their curricula in order to align them with the Bologna principles. A memorandum of understanding was signed between the Ministry of Justice and the School of Magistrates to establish a comprehensive training programme for court administrators at the School.

The government has shown a genuine interest in improving the juvenile justice system. Extensive preparatory work for improving the legislative framework has been undertaken in close consultation with UNICEF and the European Commission.

Albania’s judicial infrastructure remains deficient. A long-term Master Plan for Judicial Infrastructure has been drafted, but the declared political support of the Albanian authorities for the physical upgrading of the courts has not yet been accompanied by the allocation of the necessary resources under the state budget. Improving publicly available information on the rulings of the first instance and appeal courts (the judgments of the Constitutional Court and the High Court are regularly published) and on the services involved in the administration of justice and their corresponding fees and procedures would help foster Albanian citizens’ trust in their justice system.

The administration of justice remains hampered by the relatively low status and salary levels of judicial staff such as court and judicial administrators. Except for judges, judicial staff do not have civil servant status and their salaries are systematically lower than those of equivalent grades in government ministries. Better remuneration and job security would improve staff motivation and render the judicial system less vulnerable to corruption. The judiciary’s effectiveness could also be improved by defining more clearly and transparently the role of the various categories of court administrator and the qualifications required for each.

Although the Law on Notaries was amended in 2005, implementing legislation has not yet been adopted. No effective internal mechanism exists to ensure the implementation by the Bar Association of the Lawyers’ Code of Ethics.

Anti-corruption policy

Some efforts have been made towards progress in the fight against corruption, with the work of the Anti-Corruption Monitoring Group (ACMG) continuing, participation in the Council of Europe Group of States against Corruption (GRECO), new legislation dealing with conflicts of interest, an increasing number of prosecutions of public officials for corruption, strong action against police corruption and the ratification of a number of international anti-corruption conventions. Nevertheless, corruption remains a serious problem. Deficiencies in the implementation, enforcement and coordination of efforts nonetheless remain, and international perceptions of the country in this respect continue to be poor. Despite Albania’s efforts, and the active support of the international community in supporting Albania’s anti-corruption strategy, tangible results in the fight against corruption remain limited.

Albania ratified the Civil Law Convention on Corruption and the Criminal Law Convention on Corruption in 2001 and signed the UN Anticorruption Convention in December 2003. Albania ratified the UN Convention against Trans-national Organised Crime (the Palermo Convention), which contains several provisions related to corruption, in 2002. Implementation of these conventions requires new legislation, the development of which, with the exception of the organised crime aspects, continues to be slow. Albania is not a signatory country of the 1997 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. Albania’s penal code makes bribery a crime, but the country has no specific legislation on bribery of foreign officials.

Although the passing of a Law on the Prevention of Conflicts of Interest in the exercise of Public Functions was a positive step, the law covers MPs, the judiciary, and civil and other public servants and is insufficiently adapted to the different types of potential conflicts of interest it seeks to address. There are also concerns that new law duplicates both the Civil Service Law and the existing Law on Rules of Ethics in Public Administration. The Council of Ministers has also passed a decision on the external activities of, and gifts to, public servants. Given that individual line ministries are responsible for drafting the resulting secondary legislation, strengthened inter-ministerial co-ordination will be required if confusion and contradiction are to be avoided. Moreover, the authority responsible for overseeing implementation of the law, the High Inspectorate for the Declaration and Control of Assets, requires a substantial increase in staff numbers if it is to be effective in this role. In addition, the rules and procedures through which police and prosecutors are able to access information on assets held by suspects are not sufficiently clear.

The government has continued to support the institutional and legislative framework in the fight against corruption. As regards the institutional framework, the ACMG, a permanent body under the Council of Ministers, continued its work in reporting and monitoring anti-corruption measures. Further improvements are needed, as line ministries have shown little interest in attending the ACMG meetings and some participants have appeared insufficiently prepared. The transmission of information on anti-corruption measures implemented by the line ministries should be improved, and the protection offered by immunity should be used only in compliance with international rules and practices. Implementation of Albania’s Action Plan on the Prevention of and Fight against Corruption should be strengthened and its updates should include realistic, precise and measurable steps. Moreover, the Plan has only limited reach beyond the central public administration. Other levels of public authority should also be addressed in Albania’s fight against corruption, possibly by increasing the scope of the Plan so that it addresses regional and local corruption more effectively.

Courses have been provided on a regular basis by the Training Institute of Public Administration in association the ACMG for the training of civil servants, both at central and at local level, on ethics and anticorruption.

The number of public officials prosecuted for corruption is increasing: 171 in 2004, up from 76 in 2003 and 58 in 2002. Significant progress has also been made in the fight against corruption within the police, following the launch in early 2004 of the “Order within Order” initiative in the Ministry of Public Order. Given the close inter-relationship between corruption and organised crime, the October 2004 “anti-mafia package” should in the medium term also help alleviate some aspects of corruption.

In the framework of GRECO, Albania has adopted a Compliance Report on the recommendations contained in the December 2002 First Round Evaluation Report on Albania. The Report recognised the progress made by Albania in implementing some of the recommendations, for example regarding anticorruption strategy, the proceeds of crime and codes of ethics for groups vulnerable to corruption, but also highlighted that more effort should be made to improve the transparency of public authorities vis-à-vis the media and the public, to collect and process data on corruption from all central government institutions, to increase the autonomy of the police and the Public Procurement Agency, to strengthen the office of the People’s Advocate (Ombudsman) and to ensure that the State Auditor presents the scope and justification of its planned activities at the start of each fiscal year. The report issued following GRECO’s second evaluation round made a further series of recommendations, calling for improvements including identification and seizure of assets, public officials who move to the private sector, whistle-blowing, and training for both the tax authorities and private accountants and auditors.

Human rights and the protection of minorities

Observance of international human rights law

Albania has ratified a number of UN conventions relating to human rights, including the International Covenant on Economic, Social and Cultural Rights, and the International Covenant on Civil and Political Rights in 1991; the Convention on the Right of the Child and the Convention on the Status of the Refugees in 1992; the International Convention on the Elimination of All forms of Racial Discrimination and the Convention on the Elimination of All Forms of Discrimination Against Women in 1994. With regard to regional instruments, Albania ratified the European Convention for the Protection of Human Rights and Fundamental Freedom (EHCR) and some of its Protocols, and the European Convention for the Prevention of Torture and Inhuman or Degrading Treatment or Punishment in 1996. In the reporting period, Albania ratified Protocol 12 of the ECHR concerning a general prohibition of discrimination and signed Protocol 14 amending the control system of the Convention.

Since the European Court of Human Rights became a full-time court in November 1998, it has delivered two judgements concerning Albania. In one case the Court found that a delay in the execution of a Court of Appeal judgement violated Article 6.1 of the European Convention on Human Rights (concerning the right to a fair trial.) In another case, no violation was found. Albania has executed the ECHR judgement via an individual decision of the Council of Ministers, but Albania’s civil and criminal procedure codes currently lack specific provisions to give the ECHR’s decisions legal status systematically.

As regards the right to the protection of personal data, the Convention for the Protection of Individuals with regard to Automatic Processing of Personal Data and its additional protocol regarding supervisory authorities and trans-border data flows (ETS No. 181) were ratified and entered into force in Albania in June 2005. However, an independent data protection authority with sufficient powers over the public and private sectors and sufficient means is lacking. It is a therefore a concern that the proper implementation of data protection rules is not yet ensured.

Civil and political rights

Human rights and fundamental freedoms are guaranteed by Albanian law, and the government generally observes them. Albania has also ratified a number of international conventions in this area. Problems remain in specific areas, such the occasionally excessive use of force by the police, the failure to execute final court decisions, and in relation to prisons, pre-trial detention facilities and interference by political and financial lobbies in the media.

In 2000, Albania ratified Protocol 6 of the European Convention on Human Rights (ECHR), abolishing the death penalty for peacetime offences, and in 2003 signed Protocol 13 concerning the abolition of the capital punishment in all circumstances.

In the field of torture and ill-treatment , Albania’s legislative framework is largely in line with international standards, although Articles 86 and 87 of the Albanian Criminal Code do not yet accord with the definition of torture given in the UN Convention against Torture. Police at all levels have been given training in human rights, but the effect of this is limited - according to Amnesty International figures, an average of 35 incidents of torture or ill-treatment are reported each year. Albania should make greater efforts to ensure strict application of the law, adequately punishing perpetrators in a manner appropriate to the seriousness of their crimes. It should also increase the awareness of human rights by training judges and prosecutors on the prohibition of torture, and grant effective remedies, including compensation, to victims.

Despite government efforts to improve conditions for prisoners , for example through a new law on internal control in prisons and amendments to the law on escorting prisoners, and through the adoption of a code of ethics for the penitentiary system, conditions inside the prisons and detention centres remain poor. Overcrowding, poor sanitary conditions, inadequate medical checks and treatment, and generally low professional standards of prison staff continue to be a serious problem. The partial transfer of responsibility for pre-trial detention facilities from the Ministry of Public Order to the Ministry of Justice has helped alleviate the problem of convicted individuals continuing to serve their sentences in pre-trial detention facilities, but about 200 convicted prisoners remain in such facilities. Moreover, minors are not always held separately from adults in pre-trial detention facilities, in contravention of Albanian law and international standards. Lengthy pre-trial detention as a result of delayed investigation remains a serious problem.

Resources devoted to running prisons remain insufficient. A number of measures have been taken, however, to improve the legislative, institutional, organisational and infrastructural aspects of the penitentiary system, including for minors. As regards legislation, the Minister of Justice established a working group to draft a plan to upgrade the penitentiary system in compliance with European standards and relevant national legislation, notably the Law on the Rights and Treatment of Prisoners, the Law on Execution of Court Decisions and the Standard Regulation of the General Directorate of Prisons. A number of related laws and regulations such as a code of ethics for the prison system and a law on prison police were introduced as a result.

As far as penitentiary organisation is concerned, a number of changes have taken place, including the approval of the new structure of the General Directorate of Prisons and several modifications in the classification of pre-trial and penitentiary establishments. These organisational changes have been accompanied by transfers of prison police staff and allocations of vehicles, although the overall human and material resources available for prison management remain insufficient.

New prisons have been opened in Peqin and Lezha, and other establishments have been refurbished and their capacity expanded. Despite these improvements, most of these actions were funded by foreign donors and the infrastructure needs in the penitentiary sector remain very significant in terms of both prisons and pre-trial detention centres, where overcrowding and very poor living conditions remain a serious problem. Although some further donor-funded prison infrastructure is planned, the government needs to forma long-term investment strategy and ensure the corresponding allocation of funds in the government’s expenditure framework.

Fewer than 100 minors are currently being detained in Albania. Sentenced minors (roughly one third of the total) are kept in the minors’ detention centre at Vaqarr, near Tirana, where there is a special activity schedule and inmates can follow secondary education, but about two thirds of juvenile detainees are on remand and are kept in the pre-trial detention facilities in Tirana, Vlora and other urban areas, where there are serious problems of overcrowding and poor living conditions.

The Ministry of Justice has decided to establish a new juvenile detention centre which can hold 85 minors in Pogradec to replace the existing facility at Vaqarr. Contrary to international standards in this field (notably the UN Rules for the Protection of Juveniles Deprived of their Liberty) the size and isolated location of the planned new centre will make individualised treatment difficult and hamper families’ ability to visit their children regularly, which may potentially have a negative effect on their rehabilitation.

As regards access to justice , Albanian legislation guarantees free legal defence for defendants who cannot afford a private lawyer, but this service does not always provide timely and appropriate legal assistance.

According to the Constitution there is no official religion and all religions are equal. The government respects the freedom of religion and relations among the various religious groups are generally amicable. Albania continues to provide a valuable example of religious harmony in the region.

Freedom of expression and of the press is constitutionally guaranteed in Albania. There are a large number of formally independent media outlets, but most remain subject to political or economic interests. The professional and ethical standards of the Albanian media are generally low. Journalists are frequently intimidated through threats of prosecution for libel or defamation - offences which carry severe penalties. Libel remains a criminal offence which can result in sentences of up to two years. Although legislation is planned to address this issue, it has not yet been finalised. Cases of psychological and physical violence against journalists on the part of representatives of the state authorities are isolated, but remain present. The legal framework for the protection of media freedom remains inadequate, for instance the independence of the media is hindered by the fact that current legislation does not oblige the disclosure of ownership. Although Albania has undertaken some work on new legislation, especially with regard to strengthening the legal protection of journalists and improving and modernising their status, the parliament was unable to approve a new law on printed media before the conclusion of the last legislature under the previous government in May 2005. Progress towards introducing an organic law on the written media, and reforming the criminal and civil defamation laws has been slow. Practical measures relating to the right to freedom of opinion and expression of journalists and media representatives and also training to increase the professionalism and independence of journalists remain inadequate. A positive development, albeit under pressure from the international community, was the parliament’s rejection of a draft law on digital terrestrial broadcasting which departed from OSCE and the Council of Europe recommendations and risked creating a monopoly.

The Constitution provides for freedom of peaceful assembly and the right of association , and the Government generally respects these rights.

The Constitution prohibits discrimination based on race, ethnicity or language, but there are reports of discrimination against the Roma and the Egyptian communities. Freedom from persecution based on sexual orientation is not explicitly constitutionally guaranteed and there are persistent reports of arbitrary arrest and mistreatment of homosexuals by the police. In general terms, it appears that the level of protection against discrimination is still far from the EU standards, requiring the implementation of the principle of equal treatment between persons irrespective of racial or ethnic origin and the establishment of a general framework for equal treatment in employment and occupation, irrespective of religion or belief, disability, age or sexual orientation.

The right to property is protected by law. The adoption of the Law on Restitution and Compensation of Property and the establishment of the State Committee on Restitution and Compensation of Property and the related local commissions were an important step in fulfilling a constitutional obligation, but many of the deadlines it envisaged were not met. The Assembly therefore subsequently decided to extend the deadline for submission of property claims by a year until 2006, resulting in the potential delay of full implementation until 2007. The Assembly also adopted a Law on Valuation Methodology for Compensation of Property. In its current form, the methodology could have very considerable budgetary implications and could therefore adversely affect Albania’s ability to implement both the new restitution and compensation law and its socio-economic development priorities. Moreover, initial registration of real estate is not proceeding at the pace necessary to provide the inventory of available state land which is needed in order to estimate financial needs for cash compensation. It appears that much of the property in urban and coastal areas, where the land market is most active and which have the greatest economic potential, remains unregistered. There remain persistent allegations of the unlawful privatisation of properties where the restitution/compensation process has not yet been implemented.

Non-Governmental Organisations (NGOs) are gaining influence and taking on a growing role in virtually all aspects of the social, economic and political life of Albania. The 2001 Albanian Law on NGOs provides a solid basis for further development of the NGO sector. This law is considered one of the most liberal of such laws in the region, allowing NGOs considerable latitude of activities, rights and responsibilities. NGOs generally operate without government restriction. Nonetheless, Albania would benefit from a government policy which more actively encouraged the involvement of NGOs in the decision making process.

Economic and social rights

The government continued its efforts to promote the economic and social rights of disadvantaged groups. Some progress was achieved as regards gender mainstreaming: the parliament approved a new law on gender equality and a National Strategy on People with Disabilities was approved by the Council of Ministers. Despite these improvements, women, disabled people and the rural poor still face problems in achieving equal economic and social rights to the rest of the Albanian population.

A new Law on Gender Equality promotes equal opportunities and seeks to eliminate direct and indirect discrimination in areas such as public sector employment. A positive development has been the establishment of the State Committee on Equal Opportunity, but it has been criticised by the NGO community as under-funded and lacking political influence. Discrimination against female children is forbidden under the law, but girls, especially in rural areas, are still forced into early marriage. Women in Albania are not yet protected by specific legislation addressing the issue of domestic violence. In a traditionally male-dominated society, violence against women including spousal abuse remains a serious problem. The number of cases reported and prosecuted appears to be significantly lower than the number of real cases.

As regards children’s rights , an Inter-Ministerial Committee on the Rights of the Child and a department for children's rights in the office of the People's Advocate have been established, although neither has yet been properly equipped with staff and resources. The government has shown commitment to improving the juvenile justice system, for example by constructing specific detention centres for juveniles. The number of children hiding at home due to blood feuds has been significantly reduced, but about 160 children are still reported to be living in this situation, and are thus prevented from exercising rights such as their right to education . Efforts to help children with special needs to obtain equal access to social and economic rights should be increased, and this also applies to children who are obliged to work. Albanian law provides the right to 9 years of free education, but socio-economic problems and lack of proper documents - which are sometimes lost during internal migrations - impede the completion of compulsory education for many children. Equal access to medical care for citizens of all ages continues to be hindered by widespread informal payments and bribery.

In the field of labour rights and trade unions, the Albanian constitution guarantees the right to earn a living by choosing or accepting lawful work. The legal minimum wage for all workers over the age of 16 is approximately EUR90, which is insufficient to provide a decent standard of living for a worker and his/her household. Albanian law also provides for social assistance and unemployment benefit, but income support is very limited and is often poorly targeted. The right of association gives workers the right to form independent trade unions, although unions experienced a drop in membership during 2004 due to unemployment and member dissatisfaction.

Minority rights, cultural rights and the protection of minorities

The Albanian legislation recognizes three national minorities (Greek, ethnic Macedonian and Montenegrin) and two ethno-linguistic minorities (Vlach and Roma). The Greek minority is the largest group, led by its cultural association Omoneia. Albania has made considerable efforts to protect minorities, including in the field of education and the provision of schools and classes for certain minorities in specific areas. A State Committee on Minorities has been established to improve the representation of minorities in public life. Further efforts are now required to complete the legal and administrative framework for the protection of minorities and to implement it, mainly as regards increasing the use of minority languages in citizens’ dealings with the authorities and the display of traditional local names, improving access to media for persons belonging to minorities and extending minority language education. Contrary to its specific commitment, the government has as yet failed to provide accurate statistical information concerning the size of minorities, an issue which is of particular importance in relation to the Greek minority.

In 2003, the government adopted the National Strategy for the Improvement of Living Conditions of the Roma Minority, which also provides for a mechanism to monitor its implementation. Despite some measures under this strategy, both the Roma and the Egyptian communities continue to suffer prejudice and discrimination in a number of societal settings. The education of children, professional training and the employment of persons belonging to these minorities remains unsatisfactory. The relevant provisions of the Council of Europe’s 1999 Framework Convention for the Protection of National Minorities, to which Albania is party, are not yet fully implemented. Albania should further develop practical measures under the National Strategy for the Roma and plan financial resources for its full implementation.

Regional issues and international obligations

Albania has continued to actively pursue regional cooperation activities aimed at deepening political and commercial relations with its neighbours.

Albania is implementing Free Trade Agreements (FTAs) with the following eight countries: the former Yugoslav Republic of Macedonia, Croatia, Bulgaria, Romania, Kosovo (under UNSCR 1244), Moldova, Serbia and Montenegro and Bosnia and Herzegovina. FTA negotiations with Turkey are underway.

Albania has successfully participated in activities under a number of multilateral regional initiatives during the reporting period, including the South-East Europe Cooperation Process (SEECP), the Stability Pact, the South Eastern European Initiative (SEEI), the Adriatic-Ionian Initiative, the Black Sea Economic Cooperation (BSEC), the South-East Cooperation Initiative (SECI) and the Border Security Initiative. Moreover, Albania has continued a policy of non-interference and conciliation as regards domestic issues concerning Albanian minorities in neighbouring countries.

Relations with the State Union of Serbia and Montenegro (SCG) are reasonable and stable. The signature of an FTA between Albania and SCG was an important step, although its full potential has yet to be realised.

Albania has maintained an open and constructive policy towards Kosovo. Albania supports a settlement on Kosovo’s final status within the framework of its integration into the EU. The main elements of Albania’s stated policy on Kosovo have been as follows: full respect for human rights, including all minorities, the exclusion of partition or division or any change in size of the territory of Kosovo, and a status that reflects the will of the people of Kosovo. Initial statements by the new government have confirmed Albania’s constructive position along these lines whilst indicating a more active approach.

Relations between Albania and the former Yugoslav Republic of Macedonia have continued to be good. The FTA between the countries has led to increased bilateral trade, and in addition to state visits at presidential level, ministerial meetings have taken place on a wide variety of topics.

Italy is Albania’s main commercial partner as well as its largest bilateral donor, with a business presence of SMEs, primarily joint ventures. Italy has conducted major bilateral cooperation activities with Albania, such as the Italian Delegation of Experts, which has been assisting the Albanian Armed Forces in its efforts to meet NATO standards. As regards cooperation in the field of justice, liberty and security, Italy issued 20,000 short-term Schengen visas in 2003/2004 to Albanian citizens. In 2004 the Italian government reserved the largest individual visa allocation for Albanian citizens in response to the Albanian government’s efforts in fighting trafficking of human beings across the Adriatic Sea.

Greece remains Albania’s second largest trade partner, and positive relations have continued between the two neighbours. More than 600,000 Albanians currently live and work in Greece and the number of short-term Schengen visas issued by Greece increased by 20% between 2002 and 2004. In 2004, 17,000 work-permit visas were issued to allow Albanians to work in Greece. Major efforts towards improving communication have been undertaken by the Greek and Albanian governments.

The number of refugees in Albania continues to be small and does not therefore constitute a serious problem.

As regards the International Criminal Court (ICC), in June 2003 Albania ratified a bilateral immunity agreement with the United States which runs counter to the “EU guiding principles concerning arrangements between a state party to the Rome Statute of the ICC and the United States regarding the conditions of surrender of persons to the court” adopted by the Council of the EU in September 2002.

Albania has shown a constructive attitude in the context of Stabilisation and Association Agreement negotiations regarding countering the proliferation of weapons of mass destruction and their means of delivery. Nonetheless, capacity to monitor implementation of international obligations (e.g. regarding terrorism and non-proliferation) should be reinforced.

Albania joined NATO ’s Partnership for Peace initiative in February 1994, one of the first countries to do so. In a joint statement at the June 2004 NATO summit, Albania, together with Croatia and the former Yugoslav Republic of Macedonia, reaffirmed its readiness to maintain, and extend when feasible, its contribution to NATO’s policies, initiatives, missions and operations. Albania also reiterated its hope to achieve full NATO membership as soon as possible, and backed the inclusion of Bosnia and Herzegovina and Serbia and Montenegro in the Partnership for Peace initiative.

General evaluation

As regards the political situation , Albania has made progress in reinforcing its democratic, judicial and public administration institutions, but needs to implement strategies and laws with more vigour to further improve their functioning. Efforts have been made to fight corruption and improve human rights. Further commitment is needed to achieve significant results. Albania has continued to play a positive political and commercial role in the region.

The Parliament has remained the centre of political exchange and has passed a considerable amount of important legislation. Overly marked political confrontation has hindered political consensus on reform issues, slowing progress. New internal parliamentary rules, and in particular the strengthened European Integration Committee, could help foster constructive consensus. The July 2005 parliamentary elections were fundamentally sound and resulted in a smooth transfer of power, but showed shortcomings which demonstrated a need for further electoral reform.

The government has developed major new strategies and co-ordination tools relevant to Albania’s EU progress. In many cases further energy and commitment is needed to use them to achieve concretely improved results. The Ministry of European integration has been strengthened, but needs further resources in order to improve its leadership and co-ordination on EU issues. The merging of several ministries could improve co-ordination in related policy areas but care will be needed to ensure appropriate checks and balances.

Albania has improved the oversight, recruitment and training of its public administration and taken steps to enhance its legal framework. It now needs to ensure an appropriate division between its political and administrative levels, and improve assessment procedures and conditions of employment for its civil servants.

Progress has been made in improving the functioning of Albania’s judicial system. Training for judges and prosecutors has been improved and should now be followed by further steps to ensure their independence and better employment conditions for other judiciary staff. Measures to increase judicial transparency and co-ordination have been taken, but more are needed. Although more judgements are now executed, the level of execution remains relatively low. New legal tools and regional agreements should now be used to achieve better concrete results in fighting organised crime and terrorism.

Some efforts have been made to fight corruption: work has continued in international fora, new conflict of interest legislation has been adopted, more public officials have been prosecuted for corruption, and strong action has been taken against police corruption. Nonetheless tangible results remain limited: considerable further efforts are required to enforce current legislation and adopt new measures in line with Albania’s anti-corruption action plan, GRECO recommendations and international anti-corruption conventions.

In the field of human rights, Albania has made some efforts to improve conditions for prisoners, with a new code of conduct and internal control law for prisons, but inadequate infrastructure means physical conditions remain poor. Knowledge and enforcement of domestic law and international conventions on treatment of prisoners should be improved. Little concrete progress has been made in improving media freedom. Legislative progress has been made in reinforcing property rights, but implementation must be greatly accelerated. Albania is an example of religious tolerance, but requires further progress to reach international standards in human and minority rights.

Albania has continued to play a positive role in the region, actively pursuing the deepening of political and commercial relations with its neighbours through free trade agreements and regional multilateral initiatives, and maintaining a constructive policy towards Kosovo.

Economic situation

In its 2004 Report, the Commission found that:

“For Albania real GDP growth in 2003 has been estimated at 6.0%, up from 4.7% in 2002. At the end of 2003, inflation reached 3.3%, in line with the Government’s target. Privatisation of the largest bank of the country, the Savings Bank, has been a notable achievement. Preliminary steps have been taken towards addressing the land ownership issue. However, the medium-term sustainability of economic growth as well as the country’s ability to alleviate poverty are being jeopardised by political uncertainty and limited reform focus. The Albanian economy remains informal to a considerable extent. The business environment is inadequate and offers little to encourage investment. Corruption, organised crime, deficient law implementation and administrative inefficiency continue to place barriers to business and to hinder legal security. Despite its achievement in establishing Free Trade Agreements (FTAs) with countries of the region, Albania has been unable to fully implement all its WTO accession obligations.”

In examining the economic developments in Albania, the Commission’s approach was guided by the conclusions of the European Council in Copenhagen in June 1993, which stated that membership of the Union requires:

- the existence of a functioning market economy;

- the capacity to cope with competitive pressure and market forces within the Union;

and by the Conclusions of the Council of Ministers of 29-30 April 1997, which stated that contractual relations with the EU require

- macroeconomic institutions and policies necessary to ensure a stable economic environment;

- comprehensive liberalisation of prices, trade and current payments;

- setting up of a transparent and stable legal and regulatory framework

- de-monopolisation and privatisation of state-owned or socially owned enterprises;

- establishment of a competitive and prudently managed banking sector.

In the analysis below, the Commission has followed the methodology applied in previous annual Regular Reports.

Economic developments

Macroeconomic developments

In 2004, GDP growth remained high at about 6% as the transition related reallocation of resources continued to boost productivity. Real economic growth is projected to have reached 5.9% in 2004. Average inflation remained subdued at 2.9% in 2004 and further decreased to around 2.2% in the first three quarters of 2005, still within the target range of the Bank of Albania (2 - 4%). The lek appreciated by about 6% against the euro in 2004 despite easing domestic interest rates and occasional Bank of Albania (BoA) interventions, reflecting improved external accounts and growing confidence in the currency. The lek continued its appreciating trend, strengthening vis-à-vis the euro further by more than 2% over the first three quarters of 2005. For 2004, the authorities continued the course of fiscal consolidation and the current budget (deficit adjusted for investment expenditures) is estimated to have been broadly in balance for the first time since transition started. Amid low inflationary pressures, the Bank of Albania lowered its main policy rate to 5.0% (by 125 basis points between January 2004 and March 2005). The trade deficit narrowed to 21.5% of GDP in 2004 as re-export processing activity increased and imports remained subdued due to increased domestic supply of strategic products (electricity, foodstuffs). The current account deficit has narrowed to 6% of GDP in 2004 compared to 8.1% in 2003.

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Structural reforms

Progress in public administration reform has continued, the administrative capacity of the tax administration has improved over the recent period and several crucial reforms have been put in place (management of human resources, training, reform of the appeal system etc.) however the collection and control capacity remains weak. In the field of public financial control and internal audit, some progress has been made in 2004. Whereas privatisation of small- and medium-sized enterprises has been completed, large-scale privatisation has suffered delays. However, as far as the banking sector is concerned, the sale of Savings Bank to a strategic foreign investor was completed in 2004. In contrast, the ratification of the sale agreement that would complete the privatisation of Albtelecom was rejected by the Albanian Parliament in October 2005, calling for a review of the sale contract and the whole tender procedure.

Progress towards economic stability and competitiveness

Establishment of market principles

The development of market principles requires that prices, as well as trade, are liberalised and that an enforceable legal system, including property rights, is in place. Macroeconomic stability and consensus about economic policy enhance the performance of a market economy. A well-developed financial sector and the absence of any significant barriers to market entry and exit improve the efficiency of the economy.

Despite a somewhat confrontational political climate there was broad consensus about the essentials of economic policy. A number of initiatives have been taken in drafting various policy papers and in preparing legislation. In particular the multi-annual plan to alleviate poverty and improve governance under the National Strategy for Social and Economic Development (NSSED), the Action Plan for the Implementation of European Partnership Priorities, the National Plan on Approximation of Legislation and the Integrated Planning System (intending to integrate all policy frameworks into a single development plan linked to a medium-term expenditure framework and the annual budget) were recently set up. However, the ability of the new executive to bring about an effective policy coordination and implementation remain to be seen.

GDP growth remained high at about 6% as the transition related reallocation of resources continued to boost productivity. Real economic growth is projected to have reached 5.9% in 2004 after 6% in 2003. As far as the sector distribution of GDP growth in 2004 is concerned, transportation and construction are estimated to have grown by more than 10%, services by 6.4%, and agriculture and industry by 3%. GDP growth has been driven by productivity gains through reallocation of resources, but a broad-based expansion of tradable output has not yet taken root. In addition, the Albanian economy scores poorly in investment attraction and, despite a decrease in absolute poverty, one quarter of the Albanian population lives still below the poverty line.

External deficits shrank as the economy’s savings-investment balance improved. The export performance of Albania strengthened in 2004 on growth in re-export processing activities and import growth declined as the domestic supply of electricity and foodstuffs has improved. The trade deficit narrowed to 21.5% of GDP from 24.6% in 2003 and was largely covered by migrant remittances and other private and official transfers from abroad, buttressing incomes and domestic demand. In particular workers’ remittances play a very significant role in the Albanian economy. In 2004, they accounted for around 14% of GDP. This considerable inflow has allowed Albania to continue running its fairly large deficit in trade of goods and services. Income from migrant workers was boosted by demand for Albanian workers during the construction of the Athens Olympic sites. The current account deficit (excluding official transfers) narrowed to 6% of GDP in 2004 compared to 8.1% in 2003. Domestic investment in Albania accounts for about 24% of GDP.

The labour market began to improve. Robust economic growth during the last few years had a positive impact on the labour market. However, the magnitude of this impact is difficult to evaluate, due to substantial emigration and informal employment. At the end of 2004, the unemployment rate (based on registered data as Albania has so far not conducted a Labour Force Survey) is estimated to have reached 14.1%, which is slightly better than a year before when it stood at 15%. However, registered unemployment provides a very unreliable measure due to a significant informal sector and hidden unemployment in agriculture, while some jobless fail to register.

Inflation continued to decline. Annual consumer price inflation reached 2.2% in December 2004, compared to 3.3% in 2003. The average annual inflation rate in 2004 was 2.9% and further decreased to 2.2% in the first three quarters of 2005. The relatively low and stable level of inflation is a reflection of continued lek appreciation against the euro and US-dollar, which helped to shield the Albanian economy to some extent from developments in the crude oil market. In addition, favourable developments in agricultural production helped to keep foodstuff prices stable, which account for almost 43% of the consumer price index.

Low inflation and lek appreciation has allowed for lowering of key monetary policy rate. Amid benign inflation developments, the BoA lowered its main policy rate by 125 basis points between January 2004 and March 2005 to 5.00%. However, in real terms, the short-term interest rate has remained at a relatively high 3% and was virtually unchanged from end-2003. Together with the appreciation of the lek, monetary policy conditions indeed remained tight. The exchange rate regime of Albania is a managed float and in 2004, the lek appreciated by about 6% against the euro despite the easing of domestic interest rates and occasional BoA interventions, reflecting improved external accounts and growing confidence in the currency. The latter also being reflected in the growing share of lek deposits. The lek continued its appreciating trend, further strengthening vis-à-vis the euro by more than 2% over the first three quarters of 2005.

Fiscal retrenchment continued in 2004; nevertheless fiscal consolidation remains fragile. The authorities continued a course of fiscal consolidation and the current budget balance (deficit adjusted for investment expenditures) is estimated to have been broadly in balance for the first time since transition started, although on a cash balance basis, the budget deficit reached 5% of GDP in 2004. The tax revenue-to-GDP ratio stood at about 21% of GDP. Tax revenues collection met its target in 2004, however frequent cases of undue pressure by the tax authorities have been a major issue for businesses. The social security contribution is still unsatisfactory (less than 35% of employees in the private firms are covered). Tax evasion and tax avoidance in the household sector is sizable - undeclared household income is estimated at 52% of GDP. Albania’s informal economy is estimated to account for 30% of the official GDP, which is a key impediment to generating revenue from channels other than international trade. On the expenditure side, there are still important inefficiencies, in particular in some of the social and infrastructure sectors, calling for greater prioritisation in public investment management, planning and execution.

The macroeconomic policy mix was broadly appropriate. Fiscal policy and monetary policy have continued to be tight. Inflation has been low, GDP growth again strong and external accounts have improved. However, structural reforms in the fiscal area has been slow and should remain a priority with a particular focus on improving the budget process, expenditure management and civil service and public pay reform.

Most prices have been liberalised . Nevertheless, government subsidies still affect prices for water, education, railway transport, and electricity.

Land reform has contributed to the development of the private sector, which accounted for about ¾ of GDP in 2004 . Albania has introduced sweeping land reforms as a necessary precursor to the development of land markets. As a result of this reform, the rural landscape has been dramatically transformed with all collective farms disbanded, and approximately 98% of agricultural land (546,000 ha) distributed to smallholders. This has transformed farming from a collectivised, command structure to a fully private sector with smallholder families farming small and fragmented plots for their own consumption and the market. Pasture land and forests have mostly not been part of the privatisation process. Only recently has state ownership been transferred to communities and private persons.

Whereas privatisation of small- and medium-sized enterprises has been completed, large-scale privatisation has suffered delays . Political uncertainty and a low level of interest from strategic investors have contributed to these delays. In this context, the privatisation of the Savings Bank in 2004 constitutes a major step forward. What remains on the agenda of enterprise privatisation and restructuring essentially concerns large utilities. Albania’s overall policy is, first, to restructure and, only thereafter, to privatise state-owned companies. The electricity company KESH is still in the restructuring phase, implementing a comprehensive programme for modernisation and rehabilitation of the energy sector financed by international donor institutions as well as through own funds. The privatisation process is also ongoing in the oil and gas sector. The privatisation process of Albpetrol (production), ARMO (refinery) and Servcom (distribution) has already started. The government offered to sell at least 51% in ARMO to a strategic investor who could also apply for the purchase of the remaining stakes to be offered to the public. Nevertheless its first attempt failed and the authorities are considering ways to relaunch its privatisation. In the telecoms sector, in October 2005 the Albanian Parliament voted down ratification of the sale agreement privatising Albtelecom, requesting a review of the sale contract and the whole tender procedure. The terms of the privatisation will be bound by Albania’s relevant international commitments. In October 2004, the government adopted a concession agreement for the country’s main commercial Airport in Rinas, near the capital Tirana, allowing an international consortium to operate the airport for 20 years, bringing in an investment in the amount of about EUR 83 million and increasing the capacity of the airport to 10 million passengers by 2010. Apart from this agreement, several concessions have been already granted over the past years, although under a legal framework not fully complying with international standards. In June 2005, the previous government approved the Tirana-Durrës-Rinas railway project including associated commercial foreign financing, representing over 1% of GDP. The project still awaits parliamentary ratification.

In 2004, 55,000 operating enterprises were registered, approximately 6% more than in 2003 when approximately 52,000 were registered. 99% of these enterprises were either micro-, small- or and medium-sized, with up to 80 employees. In 2004 the number of new start-up enterprises was 9,603, which represents a 23% increase in the number of newly created businesses against 2003. During 2004, the main sectors of activity of SMEs were trade (50%), services (22%), transport (10%) and industry 12%. 39% of the total number of enterprises was concentrated in and around the capital city of Tirana.

Enterprise creation continued to face obstacles . These obstacles were mainly weak infrastructure, poor legislation and weak implementation of tax legislation, arbitrary administrative actions and decisions, deficiencies in building licensing and public procurement procedures, shortage of skilled labour and energy supply as well as access to financing. In addition, unfair competition by businesses operating in the grey economy remains a problem. To start a business in Albania, the number of required procedures is 11, which is relatively high in regional and international terms. Also associated costs (as a percentage of income per capita) are relatively high. However, the difficulty of both hiring and firing a worker are reportedly relatively low in comparison to other countries.

Practically no progress can be reported in improving company registration procedures . In particular the business licensing regime continues to be characterised by a disorganised system involving a variety of authorities applying complicated and overlapping regulations. The absence of an administrative registration and licensing process, undertaken without court involvement and following transparent and simple procedures, inhibits enterprise creation. One of the few improvements was the abolition of the requirement for annual registration with the Tax Office, as well of the licensing requirement for non-food companies. SME development needs to be further encouraged by improving the business climate, better enforcing legal framework, improving infrastructure and bringing informal sector into the formal economy, ensuring better conditions for fair competition.

Property rights remain weak, damaging the potential for investment and economic activity . Clarifying ownership rights is a fundamental requirement to encourage economic development and long-term land management. Moreover, property registration has not been completed in main urban and coastal areas (where the land market is more active and has higher economic potential). Land ownership issues have been a major impediment to bank lending to small companies because of collateral requirements. The lack of stable land rights hinders economic development and increases corrupt practices. Despite the fact that formal laws connected to foreign investments are in place, uncertainty regarding ownership of land discourages investment in Albania. Multiple privatisation and restitution programs, together with chaotic construction activity, are seriously hampering private transactions.

Albania now boasts a fully privately-controlled banking sector poised to provide improved services to businesses and households. The successful privatisation of the main Albanian bank, the Savings Bank, together with the steps taken to privatise the main Albanian insurance company, INSIG, represent considerable progress towards the completion of the privatisation of the financial sector. The Albanian banking sector now consists of a total of 16 majority privately owned banks. Given the dominant position of the Savings Bank - it accounts for around 57% of bank deposits and 70% of the treasury bills market -, competition in the Albanian banking sector is limited at this stage. However, with the privatisation of the Savings Bank and the presence of other active foreign-owned banks, competition is expected to pick up substantially. The appearance of a strategic foreign investor should facilitate the knowledge transfer and contribute to improvements in banking services.

The performance of the financial sector in channelling savings towards productive investment has recently been improving, but still remains weak. Initially the authorities pursued a financial sector policy designed to strengthen, and increase confidence in, the banking sector. This included limiting the growth of intermediation by preventing lending (and the potential creation of high levels of non-performing loans) by the Savings Bank, which accounted for more than 50% of the banking sector, until it was privatized in 2004. Following the privatisation of Savings Bank, banking activities have increased, especially lending to the private sector has been boosted, which increased by 30% over the previous year. In 2004, credit to the private sector has been growing strongly and the credit-to-deposit ratio has increased from 15.7% in 2003 to 18% in 2004. About two thirds of new credit extended in 2004 was of a short-term nature and in foreign currency. The lending-deposit interest rate spread for lek stood at 650 basis points at end-2004. For USD and EUR this spread reached 703 and 681 basis points, respectively. In addition to banks, lending through microfinance institutions and 130 Savings and Credit Associations is effective in serving those segments of the population that do not have easy access to bank financing. However, the increasing availability of credits to the private sector calls for improving the prudential monitoring of the financial sector in general. Intermediation rates are rising, but they still remain rather low. Of the 46.5% of GDP held by banks as deposits at end-2004, only 8.5% was extended as credit to the resident private sector. Commercial banks are risk-averse and it is difficult to identify creditworthy customers. As a result, banking system liquidity remains high and banks tend to hold excess liquidity in lek and foreign currency. While there are 16 banks operating in the market, only half of them are active in lending to the economy. The low level of financial intermediation remains an impediment to the development of private sector in Albania. Increasing domestic bank lending to private sector, particularly to SMEs, remains a challenge.

The insurance sector is expanding. The first stage of INSIG's privatisation was carried out in October 2003, when a 39% stake of Albania's insurance company was transferred to the International Finance Corporation (IFC) and the European Bank for Reconstruction and Development (EBRD). The IFC and the EBRD will have INSIG under their supervision for a transitional period of 1-2 years, with the objective to attract a strategic investor who would be interested in a 51% stake. In fall 2004, five new insurance companies received licenses for general and life insurance, doubling the number of companies in this sector to ten. Insurance supervision and regulation will have to further strengthen, in order for insurance to play a more central role in the country’s economic development.

The Bank of Albania has substantially strengthened its supervisory capacity through the implementation of a risk-based supervision process; however the supervisory structure is in need of further improvements. A Deposit Insurance Agency has been established and is functioning properly. Substanti