Albania is a lower middle income country with a gross domestic income per person of $3740 in 2008.The country has made significant progress over 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 almost every year. The economy has shifted from agriculture and industry to services and construction. Meanwhile, large scale migration has fueled high workers’ remittances, which make up around 8-13 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 and to 12.4 percent in 2008, lifting nearly half of the poor in 2002 out of poverty by 2008. 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, 68 projects for a total amount of $1.1 billion 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 graduated from IDA concessional flows to IBRD lending, sending a positive signal to investors and the financial markets about the economic prospects of the country. The country is now creditworthy for IBRD.
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. In February 2008 the European Council adopted a new partnership with Albania. The Stabilization and Association Agreement (SAA), signed in June 2006, entered into force on 1 April 2009. Since January 2007, pre-accession financial assistance to Albania is provided under the new Instrument for Pre-Accession Assistance (IPA). On April 4, 2009, at the Strasbourg/Kehl Summit, Albania became a new member of NATO. The prospect for EU membership continues to command broad public consensus and have yielded political cooperation around policy reform efforts. Albania submitted its application for EU membership on April 28, 2009. 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. In March 2008, Albania launched 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. Albania has successfully maintained macroeconomic stability over the last 10 years with steady growth and low inflation, but challenges loom ahead. Growth has been above five percent annually in all but one of the last ten years, and inflation has remained consistently below five percent over the same period. Despite the challenges in 2008, the year is estimated to close with 6 percent growth. However, sustaining high growth rates and maintaining macroeconomic stability will prove more challenging in the future amid the global economic crisis and deterioration in the productive capacity and financial position of the electricity sector. The first signs of adverse trends come from the declining remittances and a drop in bank deposits between October 2008 and March 2009. Given the strong links between remittances, consumption and imports, the latter are also showing signs of slowing down. As a result, the Current Account Deficit is expected to decline this year. However, this slowdown will almost inevitably be accompanied by a reduction in growth which is likely to fall below 4% in 2009. In recent years, growth has been particularly strong in industry and construction, which recorded average annual growth rates of 14.1% and 14.8% respectively over the last five years. Construction growth rates in particular were fuelled partly by buoyant remittances from migrant workers. While this growth has increased electricity demand, dry weather over the last three years has reduced the capacity for hydroelectric production (which accounts for more than 95 percent of the electricity produced). The rise in commodity prices had a temporary upward effect on inflation (which settled at 3.2 percent by end 2007 and 2.4 percent by end 2008), and contributed to rising current account deficits. In recent quarters, both construction and industry have shown signs of slowing, but this has been offset by high growth rates experienced in the service sector (financial and ICT in particular) and the acceleration of public investments (Durres-Kukes road), which helped maintain a growth rate of 6.0 percent in 2008. Monetary and financial policies 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. There are currently no significant indications of any direct or indirect threat to the financial system as a result of the international financial crisis given the low international exposure of Albanian banks. Sound banking supervision has ensured prudent credit growth and avoided sudden capital flight from local banks to their parent banks. The international reserves have not fallen so far (and stand at about 17 percent of GDP or four months imports of goods and services) as a result of a prudent monetary policy and flexible exchange rate regime. Until recently credit growth rates were around 40 percent (y-o-y), but banks seem to be adopting a much more cautious attitude in extending new credit and in rolling over the existing credit lines. The tightening of credit conditions may slow down consumption and production, especially in sectors such as construction and services, as well as limit the government’s ability to raise debt. In recent years there has been a gradual improvement in the fiscal deficit from 6.6 percent of GDP in 2002 to 3.2 percent in 2006, although it reached 5.6 percent in 2008. The gradual fiscal consolidation has resulted from a combination of improving revenue administration and reduced interest payments and has contributed to a sustained decline in public debt from 62 percent at end 2003 to 55 percent in 2007. The increases in the deficit in 2007 (to 3.8 percent, from 3.2 percent in 2006) and 2008 are largely due to increased public investment, and can therefore potentially be reduced in later years. Given the current global economic crisis, the availability of financing could become a constraint, at least during 2009. The government has planned a 2009 budget deficit of 4.2 percent of GDP, based on an optimistic GDP growth scenario of 6 percent, and aiming to complete most of the Durres-Kukes-Morine road works while pursuing another round of wage and pension increases. The total public debt-to-GDP ratio fell from nearly 67 percent at end 2001 to about 53 percent at end 2008. 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. 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. High and rising current account deficits in 2007 and 2008 arose mainly from the acceleration of public investment as well as higher electricity imports. In 2009, this trend is expected to reverse, following the drop of food and oil prices, and the decline in imports as aggregate demand, which should more than offset the impact on exports of a less favorable external environment. Part of the increase in the CAD in 2008 has been financed by a rise in FDI, and ongoing privatizations may help to maintain a reasonable flow of FDI even in 2009. However, medium-term FDI flows will depend on a strong reform agenda.
Challenges Ahead
Notwithstanding the current international economic environment, Albania is well-poised to continue its positive economic performance and to advance towards its goal of European integration. A decline of growth rates in 2009 seems unavoidable but the economy should recover fairly quickly after the global crisis eases. The country's growth and competitiveness, however, 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 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 pricing to ensure cost recovery for public infrastructure services, while protecting the poor; • Ensuring progress on the country's integration process to accelerate future accession to the European Union.
The World Bank’s mission in Albania is to help the country achieve economic and social development as it moves closer to Europe. The World Bank's support program aims to contribute to poverty reduction and improvements in living standards, job creation, government accountability, and infrastructure and social services. A 2006—2009 Country Assistance Strategy (CAS) for Albania closed in June 2009, following Albania’s graduation from IDA, which supports the world’s poorest countries. Albania is an IDA success story, with the Bank playing a major role in supporting reforms, strengthening institutions, and financing investments across the full range of sectors. A Governance component was introduced in all projects, programs, policy advice and dialogue, and in every sector of the economy in which the Bank contributes explicitly to Albania’s goal of improving governance and reducing corruption. However, the effective implementation of some interventions remains constrained by the weaknesses in public administration. A new Country Partnership Strategy for 2010-2013 is under preparation. This document will guide the World Bank’s program of policy and investment lending and analytical and advisory services for the country. The new Strategy will be developed based on consultations with the Government, Parliament, donors, civil society, the private sector, and other important stakeholders in the country. 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$303 million comprising projects in the social sectors (US$51 million), energy, transport, and water (US$130 million), business environment reform including land management (US$62 million), and agriculture, environment and community development ($60 million). Ongoing analytical work focuses heavily on 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.
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. Local infrastructure has also been upgraded, and financing of national and rural roads has improved communications within the country, facilitating people's access to economic and social centers and services. Innovative microfinance programs have also 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$303 million comprising projects in the social sectors, energy, transport, and water, business environment reform including land management and agriculture, environment and community development. Ongoing analytical work focuses heavily on 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.
Going Forward
The IBRD lending program for next fiscal year will continue to depend on the macroeconomic and fiscal framework and the implementation of the policy reform program including in the areas of administrative and regulatory reform and expenditure policies in the pensions, health, and water sectors.
In Lushnje, a reliable market for produce triggers a rise in productivity.
For general inquiries on the World Bank in Albania please contact:
Ana Gjokutaj The World Bank Office "Dëshmorët e 4 Shkurtit" St. Tirana, Albania Phone: (355 4) 280 650/1 Fax: (355 4) 240 590 Email: agjokutaj@worldbank.org Website: www.worldbank.org/al
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