Media briefing of Jane Armitage, Country Director and Regional Coordinator for Southeast Europe Tirana, November 1, 2012
Good morning. Thank you very much for coming. This is for me a very sad occasion, because this is my last visit to Albania. I’m completing five years as a Country Director for the Western Balkans and as it is normal in the World Bank every four or five years we have a rotation and bringing a new senior manager Country Director for the Western Balkans, that is a very normal process which I think is healthy to allow the World Bank and to allow people to bring experiences from other regions to common countries.
So, I’m doing a farewell tour of all the countries for which I have been responsible in the Western Balkans and starting here in Albania. As I say it’s a very sad occasion for me because I have really made so many friends here in Albania and grown to really know and love your country. I’m sure this morning we will talk a lot for macroeconomic issues and debt levels and fiscal deficit, growth and eurozone recession, but I have also in the course of five years spend a great deal of time visiting almost every corner of Albania looking at the impact of the projects that we finance. And I see somebody has the brochure prepared for the 20 years of partnership between the World Bank and Albania and I do encourage you to look at that to understand the breadth of the areas that we support: in education, in irrigation, in water, in forestry, in roads, in energy, in health, in social protection…I’m sure I’m missing some. But anyway, it’s a very broad range of projects and that has been very satisfying to visit the country and talk to beneficiaries and see the impact of these projects.
But there is no question that during the five years I have been working in the Western Balkans including Albania have been extremely difficult for all the countries including Albania. I began working in the region in January 2008 and of course by the fall of 2008 the world saw the global financial crisis which had such a catastrophic impact throughout the world and led to recession in most of Europe and a very sharp decline in growth rates for Albania. So, growth rates felt very sharply, they were negative in many countries. Albania maintained still positive growth rates, but still much lower than before and not sufficient to continue reduce poverty and improve social welfare. But the hope on that time was that there would be a relatively quick recovery and indeed in 2010 and 2011 there was a somewhat weak but positive and encouraging signs and throughout the region the growth rate got back to into positive territory. Lower than before but still it seemed that there was a fragile recovery going on in the region. But then, very unfortunately the region of the Western Balkans and Albania has now faced the impact of the continuing crisis in the eurozone as well as very difficult winter. You remember all the snow that was, an unusually hard and difficult winter, followed by a very severe drought, as well as a general global slowdown. Even China which continued to grow but still in less high rates that before and the result of this is that for Southeast Europe generally we have what is a very terrible thing a double dip in the recession. And so overall the average growth for Southeast Europe will be negative again, led in particular from Serbia which has a -1.5 % growth this year and it’s of course the largest economy in the region.
Of the six countries for which I am responsible Kosovo, Macedonia and Albania have still maintained positive growth rates in 2012, but much lower than before. Kosovo is actually doing the best of all the countries between 3.5 to 4 % partially because they are less integrated in the world economies, so they are less affected by the slowdown in Europe, partially because of massive increases in public spending particularly on transport. They have the fiscal space because they have a very low level of public debt, so Kosovo is doing better but Albania, you know, the real growth this year is likely to be more than 1% perhaps a little low. The prospects for the next year while we expect they will be a slight increasing growth, it’s a fairly slow and fragile recovery for the Western Balkans because of their links to Europe where the Euro zone crises continues, links through trade clearly for Albania its main trading partners are in Europe and Southern Europe, Greece and Spain, and so on and Italy, but also labor market linkages, remittances, which are declining, they are still positive up to 9% of GDP, but less than before and the outlook looking very uncertain and then links through the financial sector are the Banks. So we do not expect the situation to get much better very quickly over the next year. As I mentioned after the first global financial crises shock, Albania was able to maintain reasonable growth rates through very heavy level public spending in investments particularly in transport, but at this point fiscal space is really exhausted in Albania, and debt levels at 60%, you have heard me say this many times are the highest in the region, we believe they are levels represent quite significant risks for the country in terms of being able to finance roll over its debt and finance its deficit, and there is no scope now for increasing deficit and increasing debt to keep growth going.
So we do believe that a strengthened feat for fiscal consolidation, which means basically trying to keep the deficit under control and gradually to reduce the level of public debt is top priority for Albania. Situation is even more difficult and risky than number might suggest because as you also heard me say before, one of concerns that we have in Albania as in other countries we have seen a significant increase in the level of public sector arrears, both in terms of timely back refunds to the public sector or in paying for construction work or services that have been provided to the public sector and well we do not have exact numbers, we are concern that the level public sector arrears may be between one or even up to 2% of GDP.
Albania is not the only country that has accumulated arrears in the public sector over the last couple of years, we see this across the Western Balkans as the result of the slowdown in growth the falling tax revenues and the general difficult situation, but the fact that other countries also have arrears does not make it right and does not mean that it’s not a very serious problem that must be addressed.
There is a very obvious and direct link between the failure of the public sector to refund the arrears or pay its bills and health of the private sector and this in term means that the private sector may not be able to service its loans from the bank and is certainly one part of the explanation for the increase of nonperforming loans that we seeing here. They have increased quite sharply and are now over the 20% in Albania. Obviously achieving fiscal consolidation at the time of recession in Europe and more broadly in Southeast Europe is a very, very difficult challenge. Very few governments would want to increase taxes at the time when economy is suffering and cutting expenditure is also very difficult when economy is in recession and that is why we have said repeatedly that if this privatization of Albpetrol is successful, we certainly hope it will be, that is a really golden opportunity for Albania to use the receipts from the privatization to help improve its macroeconomic situation, pay off arrears is the first priority and then also use the proceeds to start to retire debt so to bring down this very high level of public sector debt. So we really think that Albania could be very fortunate in having this opportunity at this difficult time to get privatization receipts and it’s imperative that they are used wisely to help strengthen the macro economic situation here.
In addition to fiscal consolidation there is a constant need for continuous structural reforms that would be important for Albania to get back onto the growth part and be competitive. These include continuing to strengthen the rule of law, which is something that the European Commission has very much emphasized. We are very happy that the Commission recommended that Albania be given candidate status by the Council in December. We hope that it will happen. But I would note of course that they would emphasize very much the need for continued improvements on the rule of law, which we would agree with.
Other important reforms include continuing to improve the business climate. Investing in skills, improving the quality of education at all levels to ensure a highly skilled labor force, continuing reforms in such areas as pensions. Strengthening this social safety net, as growth has slowed and unemployment has risen, it’s more important than ever that safety nets are well targeted and use scarce resources are used very efficiently. And continue of course to invest in infrastructure, in energy. I’m sure there will be some questions in energy, transport, water and sanitation, irrigation. So this is a very large agenda for whichever government wins the elections in June, of structural reforms as well as fiscal consolidation. So there is a very tough agenda facing Albania in the years to come, I’m sorry I will not be there but the Bank will be here, with the strong presence in Tirana and also support from Washington to help the government and the people of Albania to address these large structural challenges to increase growth again and continue the efforts to standards of living and reduce poverty here.
We try at the World Bank to make sure that we have an open dialogue with the government for the issues that are important, the economic and social issues, but also with the opposition and will continue to try and having a healthy discussion for the challenging the country. I do believe that the media has a very important role to play here, in focusing the dialogue here in the run up to the election on issues…issues such as pension reform, property rights, fiscal consolidation, and skills. The situation here like in many countries is very polarized politically, there is a tendency for a lot of what I can call only “mudslinging accusations”, but the challenges facing the country are very real. Whichever party gets into power, it will be a coalition; will have to face these difficult public management, macroeconomic and structural challenges. I think media can play a very important role in ensuring that the discussion is about these real economic and social issues rather than normal party politics of criticism. I hope we can partner together in shining a light with the analysis and with the numbers and the region comparisons on the sorts of choices that are facing the new government next year whichever one that might be.
So, I’m very happy to answer to any questions you may have.
Nertila Maho: Panorama newspaper: I have two questions, one is related to energy sector, the other is related to pension reform. Yesterday CEZ headquarters in Prague, mentioned they were considering withdrawing from Albania and also they mention they were considering to request the execution of the World Bank guarantee of about 60 million EUR. My question consist in two parts: Is the World Bank ready to go ahead with the execution of the World Bank Guarantee and the second part: Does the World Bank have similar experiences in other countries?
Second question: Yesterday, PM declared that he already had the pension reform ready to use, of course pending the approval by the opposition parties. Since the government has this prepared pension reform what is the assistance the World Bank is offering to the government with the on the pension reform?
Jane Armitage: On energy, we are extremely disappointed at the outcome of the privatization of electricity distribution. We were very involved in helping the government to come to the decision of the privatization. Both IFC and the World Bank provided a lot of technical advice and we supported both the decision to privatize and the process that was undertaken which was transparent and competitive. When CEZ won the privatization, we were encouraged, because CEZ had a global reputation, it is a very experienced company, has experience in this area and there had been many experienced examples of privatization of energy distribution in the world and in the region, including some successful experiences with CEZ.
So at the time of this decision we had advised the government. We felt that it was the right thing to do. The idea was that it would lead to the reduction of the technical and commercial losses and improving service delivery for consumers. But obviously three and a half years later we share the deep disappointment of Albanian citizens and the government with the outcomes of this privatization.
Just next door in Macedonia, there was a successful privatization in distribution. It’s an Austrian company, Evian. These processes are always extremely difficult and in fact when I started as a country director 5 years ago, I went to Macedonia and the number one issue was concerns about the privatization of electricity distribution. There were a lot of difficult discussions and negotiation, misunderstanding between Evian and the government of Macedonia Five years later these has been worked through and it has been a success. Recently, in Kosovo, the IFC has supported a successful privatization of electricity distribution, or at least the beginning of it and a Turkish consortium has been selected to support the privatization of electricity distribution in Kosovo. So we continue to believe that can in the right circumstances be the right thing for the country.
But the experience here has not been successful in any way. We are extremely disappointed on the CEZ side. They have not been able to reduce technical commercial losses, which was the expectation. To the contrary they have increased. They have not been able to increase billing and collection, the situation has got worse. That was not the plan at all. It has been extremely disappointing. As I say, CEZ is an experienced company and has had a lot of success around the world, but at least here it seems that the team that is on the ground was not able to deliver the improvements that were expected. At the same time, government institutions and consumers have not paid their bills. All parties in a sustainable energy market need to play their roles and it is essential that both consumers and government institutions pay their bills and accept increases in tariffs and there have been failure on their side as well. So the situation is very difficult. The government and CEZ are now negotiating. It seems that both sides are looking at an exit. But I do not feel that is appropriate for me to comment on the actual negotiations right now which are at a very delicate stage. Both sides are engaging lawyers and will be engaged in intense negotiations. We are certainly not ready to execute our guarantee at this point. There are a lot of legal negotiations that need to happen over the next few months. We will be providing support as best we can to the government both in the immediate few months during these negotiations, but also we are preparing an emergency energy credit to help the government to finance electricity imports and also to continue reforms to put the sector on a sustainable basis. That is the top priority for us. We are working on a 100 million dollar loan to the country for the energy sector on emergency basis.
Pension reform is going to be an extremely important issue for Albania in the coming years. At the moment the situation is not as serious in Albania because you have a relatively young population compared to many of your neighbors and that is helpful. If you compare your situation for example to Serbia, which has a rapidly aging population, and in Serbia the expenditures about pensions are 13% of the GDP and the situation here is not so extreme. Still, over time, people are living longer, fertility will decline, the labor force will shrink and you will face the same problems in a sustainable financing of the pension system that the neighboring countries have.
This will require reforms, such as rising the retirement age, eliminating lope halls for early retirement, possibly increasing contributions, looking at replacement rate for benefits. There are many reforms that will be necessary in the medium term. In the short run, probably the most important thing, particularly in an election year is to avoid the tendency, I’m sure in both parties, to promise pension increases. We see this all over in an election year, parties promise pension increases, because pensioners are very important part of their voting populations and ad hoc pension increases can than have implications for the cost of the pension system for many years to come. What would be important, best practice is to index the pension increases to inflation rates. That is the best practice. We have been helping the government for a number of years. Pension models are extremely complex. They need to be updated regularly and we are providing technical assistance to update the pension model and run it under different scenarios and model different types of policy reforms. I suspect this would be very important after the election for the new government to start to implement some of these reforms. As I say on the one hand the levers for the pension reforms are clear but you need to run the model and actually look at the particular options, when they should be introduced quickly. So this is something that we are helping the government with. But it will require a broad dialogue with all political parties because pension reform is so difficult in every country in the world. It’s one of the most difficult reforms and so I think it will be a subject to discussion in the coming year and we will continue to provide technical assistance and to advise the government on how best to do this reform.
Ilirian Agolli, Voice of America: I’m talking about CEZ, do you think it would be better to give some additional time to CEZ to improve its indicators or is it better to have a completely new company that will come across the same problems, consumers won’t pay their bills and they would need to increase the tariffs etc.
Jane Armitage: We have tried to encourage the Government and CEZ to work out their disagreements over the last year. There have been many such meetings. At this point at both sides there is a lack of trust and at this point this is a marriage that is headed now to divorce. But you are right the issues remain the same. Increasing tariffs, increasing billing and collection, major investments to reduce the technical and commercial losses. These will face a new company as well. I fear at this point that time has run out. There have been a lot of efforts to try and get an agreement between CEZ and the government and I think at this point it is a divorce that is on the cards in the next few months.
Ediol Halilaj, TV Klan: Is there any assistance package for the Western Balkans, including Albania, so that these countries can cope with the eurozone crisis impacts? I’m saying this, because a few days ago in Tokyo during the IMF annual meetings, there was an idea to provide about 15 billion dollars that would assist the western Balkan countries, part of which could be used for Albania.
Jane Armitage: Absolutely you are right. There are wide recognitions that the Western Balkans region is particularly negatively impacted by the situation in the eurozone. In East Asia, in Latin America we are seeing a recovery, but the Western Balkan and the Central and Eastern Europe are still very negatively impacted and there is a need for the European Commission, the IMF, the World Bank, EBRD, EIB, and bilateral donors all to step up support. And we are planning to do so, throughout the Western Balkans and here in Albania, to provide more financial support and link it to important reforms, fiscal consolidation and structural reforms to help these countries to weather this very difficult situation.
Valbona Mezini, TVSH: Ms. Armitage, at the end of your mission here in Albania, how would you evaluate the cooperation with the Albanian government with regard to the implementation of the World Bank projects?
Jane Armitage: I think, as I said at the 20 years partnership celebration, we feel that we have really an excellent and close relationship here in Albania. We have an excellent local office and I hope you know these people and talk to you regularly and share information. We are very satisfied with our partnership here and look forward for its continuing for many years to come even if Albania is on track to join the European Union. It’s a middle income country and we believe that there are a lot of areas where we can learn from Albania’s experience and we can also bring global experience to the country. So our relationship is not just about lending, although that’s important, it is also about analytical work and advice and capacity building, as well as knowledge sharing. The experiences from the new EU members states, Croatia in particular now which is about to join, but also Romania, Bulgaria. These are experiences that we can hopefully learn from to help Albania as it continues its path towards the EU accession.
Benet Koleka, Reuters: As you said you were the match maker of the marriage and the counselor and said there is a dowry in case things go wrong. You said now that at this delicate stage of negotiations you are not executing any guarantee.
Jane Armitage: That is correct.
Benet Koleka, Reuters: But is that totally ruled out or there is hope for any…at the same time the government is getting 100 million dollar, the private sector represented CEZ…
Jane Armitage: I really don’t want to comment on the outcome. We did provide the partial risk guarantee. But a dowry…this is not a gift from the World Bank. This will be a loan that Albania would be taking. So, CEZ would get the partial risk guarantee, CEZ would get the money but the government would take on this loan. So it’s not like a fairy godmother dowry gift. If the partial risk guarantee is implemented then the Government of Albania would be taking on an additional loan. So, I really think we should leave it to lawyers to work out exactly whether the partial risk guarantee should be called.