Country Brief 2007 Updated January 2008

• Key Facts
• Economy
• World Bank Program
• Contact Information

Map of Albania

*Most recent data available 2001-2006 More Albania data

Albania is a lower middle income country with a gross domestic income per person of $2927 in 2006.The country has made significant progress since its transition from a communist regime towards a market-based economy. Albania has pursued major structural and economic reforms and has pushed ahead with the establishment of democratic institutions. With the exception of the pyramid crisis of 1997, it has achieved and sustained strong economic growth, while containing inflation in almost every year. The economic structure has shifted from agriculture and industry to services and construction. Meanwhile, large scale migration has fuelled high workers’ remittances, which make up around 13 percent of GDP.

High GDP growth rates of around 5-6 percent per year have been accompanied by a massive reduction in poverty. The absolute poverty rate fell from 25.4 percent in 2002 to 18.5 percent in 2005, lifting roughly one quarter of the poor in 2002 out of poverty. The extreme poverty rate decreased from about 5 to 3.5 percent but inequality rose marginally.

After Albania joined the World Bank in 1991, the Bank became one of the country's main sources of development assistance. Albania is a member of the International Development Association (IDA), International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), and the Multilateral Investment Guarantee Agency (MIGA).

Since the inception of the World Bank’s program in Albania, 64 projects for a total amount of $934 million have been approved by the Board of Directors. In 2008, on account of its strong achievements in economic growth, Albania has achieved middle income status and will graduate from IDA concessional flows to IBRD lending. This should allow larger amounts of financing and also send positive signals to investors about the economic prospects of the country.

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Economy

Developments Since Transition

Albania's impressive performance since transition began in 1991, but came to a halt during the large-scale civil disturbances of 1997. The collapse of widespread fraudulent pyramid schemes underscored the fragility of the country’s institutions. After the crisis, the country restored and maintained macroeconomic stability and put structural reforms back on track. Despite the Kosovo conflict and the massive influx of refugees in early 1999, the successive governments were able to continue the implementation of structural reforms, aided by significant external assistance flows.

In January 2003, Albania started negotiations with the European Union (EU) for a Stabilization and Association Agreement. After three years of negotiations, in February 2006, the European Union and the Albanian government signed the Stabilization and Association Agreement. The Interim Agreement which entered into force in December 2006, provides guidance on areas of the political and economic reform which need to be strengthened in preparation for further integration into the European Union. Since January 2007, pre-accession financial assistance to Albania is provided under the new Instrument for Pre-Accession Assistance (IPA).

Albania is also a signatory and member of the Energy Community of South East Europe which is establishing a regional, open and competitive energy market, and part of the South East Europe Transport Observatory which lays out regional network priorities in transport modes. Albania has also contributed to the finalization of the Central Europe Free Trade Agreement in 2007.

In late 2007, Albania will launch its National Strategy for Development and Integration (following on earlier National Strategy for Social and Economic Development) which lays out reform and development priorities for 2007—2013.

Recent Economic Performance

Since the onset of transition, economic growth has been driven by rapid expansion of consumption (following years of pent up demand under the communist era) and productivity growth as the old industries collapsed, a new service sector emerged, and workers migrated. This performance has been underpinned by consistent macroeconomic stability.

Over the past few years, Albania maintained macroeconomic stability as well as high rates of economic growth. After a slowdown in 2002 caused by electricity shortages and floods, growth recovered to close to 6 percent between 2003-2006. Export growth accelerated, albeit from a very low base, underpinned by improving commodity prices, an increase in tourism and favorable weather conditions, which positively affected agriculture and agro-processing. Albania witnessed a modest slowdown in GDP growth to 5 percent in 2006 due to deterioration in the electricity sector’s performance, lower activity in the construction sector, and a slowdown in exports. In 2007, the impact of the exacerbating electricity shortages is likely to continue to slow growth somewhat.

Monetary and financial policies curbed inflation, fostered confidence in the national currency (Lek) and spurred credit to the private sector. Inflation has been maintained within the 2–4 percent target range since 2002. The privatization of the Savings Bank and the easing of the monetary policy stance helped boost private sector credit growth, albeit from a low base.

Fiscal consolidation has reduced the overall budget deficit, with the latter declining from 8.5 percent of GDP in 2001 to 3.3 percent in 2006. The total public debt–to–GDP ratio fell from nearly 67 percent at end 2001 to about 56 percent at end 2006. Sustained economic growth, Lek appreciation, falling interest rates, and the use of privatization proceeds to retire public debt contributed to the decline in debt ratios.

Nevertheless, Albania suffers from large current account deficits. Large inflows of current transfers and positive service balances in recent years have helped dampen the rising trade deficits. Imports have steadily grown reaching 49% of GDP in 2007 with exports lagging behind at 23% of GDP leaving Albania with a trade deficit of 24%. Large remittances at around 14% of GDP have been critical in counterbalancing high trade deficits. In 2007, soaring electricity imports have led to a significant deterioration of the current account deficit.

Challenges Ahead

Albania is well–poised to continue its strong economic performance and to advance towards its goal of European integration. However, the country’s growth and competitiveness remain constrained by low levels of exports and private and foreign investment, weak governance, and structural bottlenecks in the infrastructure sectors. To sustain high GDP growth and to improve standards of living, the agenda for reform needs to focus on the following priorities:

• Maintaining stability and forging consensus on a vision of long-term development;
• Improving governance and strengthening institutions to ensure managerial integrity within the public administration; reliable, predictable and fair enforcement of the rule of law; and a stronger role for citizens and civil society to participate and monitor how public services are delivered;
• Maintaining a stable macroeconomic framework, notably through fiscal discipline, and raising public savings and the quality of public investment, and further mobilizing revenues;
• Accelerating human resource development by improving health, education, and training systems; and fostering the creation of formal, rather than informal, sector jobs;
• Improving the business environment, boosting trade, and accelerating regional integration to create a more favorable environment for domestic and foreign investment and job creation;
• Upgrading public infrastructure to raise productivity through better prioritization and selection of economically viable investments, strengthening regional cooperation on backbone networks, improvement in the management and governance of public utilities, and setting pricings to ensure cost recovery for public infrastructure services, while protecting the poor.
• Ensuring progress on the country’s Stabilization and Association Process to accelerate future accession to the European Union.

World Bank Program

Program to Date

Landmark Projects

• Energy community
• Water Resources Management
• Health System Modernization

More projects

As part of its recent and ongoing assistance to improve the country’s institutions and governance, the World Bank has helped to professionalize the civil service and set Albania on the path to modernize its public administration and improve its public expenditure management practices. Financing of national and rural roads has improved communications within the country, facilitating people’s access to economic and social centers and services. Local infrastructure has also been upgraded, and innovative microfinance programs have helped rural people with income–generating activities. World Bank projects have also focused on health care, education, and improving social protection and social service delivery systems.

The World Bank’s current lending portfolio is approximately US$260 million comprising projects in the social sectors (US$40 million), energy, transport, and water (US$100 million), business environment reform including land management (US$60 million), and agriculture, environment and community development ($60 million). Ongoing analytical work focuses heavily on the business environment, strengthening future sources of growth and competitiveness, improving the efficiency and effectiveness of public spending, and improving governance in the social services and the utility sectors.

Looking Ahead

As planned, Albania will successfully graduate from IDA to IBRD in 2008, sending a positive signal to investors and the financial markets. The country is now creditworthy for IBRD and has received its first blended operations.

Also in 2008, a mid-term review of the CAS will be undertaken to review progress to date on achieving CAS goals, to determine levels of IBRD lending going forward, and to outline the final year of activities and the challenges for the next CAS in 2010.

The Country Aggregate Report provides more lending data for Albania.

NB: Lending is per fiscal year, July 1–June 30

NB: Lending is per fiscal year, July 1-June 30

Active Portfolio by Sector as of June 2006
(US$ millions)

The Country Aggregate Report provides more lending data for Albania

Contact Information

Ana Gjokutaj
Communications Officer
Email: agjokutaj@worldbank.org

The World Bank Office
"Dëshmorët e 4 Shkurtit" St.
Tirana, Albania

Tel.: (355 4) 280 650/1
Fax: (355 4) 240 590
Website: www.worldbank.org/al