Overview

Country Context

Albania 2015
Population, million 2.9
GDP, current US$ billion 11.1
GDP per capita, current US$ 3840
Poverty rate ($5/day 2005PPP terms) (2012) 47.5
Life Expectancy at birth, years (2014) 77.4

After Albania emerged from 50 years of communist rule, the transition from a centrally planned to a market-oriented economy, together with abundant international aid and other strategic assistance, helped Albania to make progress. On account of strong growth performance, Albania grew from the poorest nation in Europe in the early 1990s to middle-income status in 2008, with poverty declining by half during that period.

The country’s economic transformation continues to build on its huge potential and opportunities. However, the global financial crisis exposed the weaknesses of its growth model and highlighted the need to shift from consumption-fueled to investment- and export-led growth. Some groups in the population have less access to economic opportunities, and the new model will help them contribute to and benefit from economic growth.

In order to accelerate the pace of equitable growth, Albania needs to implement structural reforms that will raise productivity and competitiveness in the economy, create more jobs, and improve governance and public service delivery. Enhanced regional connectivity and access to regional and global markets, coupled with export and market diversification, can also help to promote faster growth.

Recognizing these challenges, the Government of Albania in 2014 embarked on a broad-based reform program focused on macroeconomic and fiscal sustainability, financial sector stabilization, energy concerns, pensions, and territorial administration. Significant progress propelled by the ongoing reforms has created the conditions for rebounding business confidence and domestic demand, including early signs of increased investment and an export-led recovery. Maintaining the reform momentum and implementation is critical for Albania’s continued economic growth and its aspirations for European Union (EU) integration.

Strategy

Number of projects 9
Lending  US$544 million
IBRD  9 loans (US$509 million)
IDA lending  US$35 million
Grants  8 ($17 million)

The current WBG program in Albania is guided by the Country Partnership Framework (CPF) FY 2015–19, which provides analysis, advice, and financing in support of Albania’s equitable growth and integration into the EU. To design this new strategy, a Systematic Country Diagnostic (SCD) was carried out to identify the challenges that Albania faces, as well as key priorities and possible solutions on the road to growth and prosperity.

The Government’s main priorities, including macroeconomic and fiscal sustainability and competitiveness, as well as governance and accountability in the public services, energy, land, and water sectors, are well aligned with the priorities highlighted in the SCD.

The new CPF significantly ramped up WBG engagement and laid out an indicative lending program of up to US$1.2 billion, which focuses on three main areas: 

  • restoring macro-economic balances;
  • creating conditions for accelerated private sector growth;
  • strengthening public sector management and service delivery.
Key Engagement
 
The Albanian pension system, established in 1947 during the socialist era, faced enormous challenges during the transition years, leading to a significant increase in the fiscal deficit. The fiscal pressure was likely to grow further due to the expected aging of the Albanian population, as the share of elderly is expected to more than double by 2050. Only 35% of the working-age population made contributions in 2012, and 40% of the pension fund was paid by the state budget. There was therefore a critical need to reform the pension system to protect the future elderly.

The Government of Albania recognized these challenges and requested technical assistance from the World Bank in providing recommendations and advice. The Bank has offered timely and ongoing technical support by providing an analysis of the needed policy changes and sharing international experiences. Since pension reform is a sensitive area, the Government organized a consultative process with the stakeholders and the broader public in 2014 in order to ensure widespread support. As a result, the country’s parliament passed a major pension reform program in 2014 that will reestablish a positive link between contributions and benefits.

At the same time, it instituted a social pension for those who have not contributed sufficiently due to unemployment or employment only in the informal sector. In addition to immediately providing better retirement structures, the pension reform is expected over the long term to render Albania’s pension plan self-sustainable, compared to the largely state-funded plan of the past. It does this by gradually raising the retirement age from 60 to 65 for women to eventually equal that of men. Under the reforms, people who have worked in particularly laborious jobs, such as miners, will be able to retire at 55 (a reduction of five years).

These changes will help protect the pension system as the aging of the population, which is already happening in other European countries, begins in Albania. So far during the first two years of reform implementation, about 2,200 elderly people have received a social pension. In addition, the pension ceiling has been removed.

Number of Active Projects 9
Lending US$544 million
IBRD 9 loans (US$509 million)
IDA lending US$35 million
Grants 8 ($17 million)
Number of Active Projects 9
Lending US$544 million
IBRD 9 loans (US$509 million)
IDA lending US$35 million
Grants 8 ($17 million)
Number of Active Projects 9
Lending US$544 million
IBRD 9 loans (US$509 million)
IDA lending US$35 million
Grants 8 ($17 million)

RECENT ECONOMIC DEVELOPMENTS

Albania’s economy continued to expand in 2016, supported by robust private investment and a recovery in consumption. Growth accelerated to 3% in the first quarter of 2016 and is projected to reach 3.2% for the full year. Economic growth is reflected in the higher labor force participation as jobs have opened up. Net external trade continues to undermine growth, however, because of falling commodity prices hitting exports and an uptick in investment-related imports.

Fiscal consolidation has continued in 2016, leading to a decline in the public debt-to-GDP ratio for the first time since the global crisis. The fiscal balance improved as more revenue was collected and capital spending declined. The budget deficit is expected to reach 2.5% of GDP in 2016, down from 4.8% in 2015, helped by a strong revenue performance, controlled current spending, and lower capital spending. The public debt-to-GDP ratio is expected to start declining to 72.5% of GDP in 2016, from 72.7% in 2015. A recently approved organic budget law mandates an annual decline in public debt until it reaches 45% of GDP.

The current fiscal deficit is projected to expand in 2016, but it will continue to be financed primarily by foreign direct investment (FDI) inflows and external public borrowing. After narrowing to 11.7% of GDP in 2015, the current account deficit is expected to reach 13% in 2016, led by a worsening balance of trade in goods and services. Services exports are performing well, although exports of goods are expected to decline on account of low commodity prices. Total imports continue to increase due to high FDI-related imports.

Economic growth, combined with labor market trends and patterns, is estimated to have reduced poverty and promoted inclusion. Albania has benefited from positive job creation. Labor markets have continued to improve steadily, with employment growing by 6.7% in annual terms in the second quarter of 2016. Better employment outcomes are the result of a reduction in unemployment as well as higher labor force participation rates.

ECONOMIC OUTLOOK

The Albanian economy is expected to expand in the near term, driven by a recovery in consumption and robust investments. Net exports are expected to gradually contribute to growth as EU economies recover. Risks to the outlook are mostly on the downside, but a stronger pace of structural reforms could help mitigate the impacts.

However, external developments associated with slow growth in the EU may adversely impact Albania’s growth and poverty prospects through reduced remittances, exports, and foreign investment. Fiscal pressures or increased business uncertainty associated with next year’s elections could also slow down growth. Faster than expected improvements in the business climate and reforms to address the high nonperforming loans could further strengthen private investment and consumption over the medium term.

Growth is projected to be 3.2% in 2016, 3.5% in 2017, and 3.8% in 2018. The medium-term outlook depends on the pace and depth of the structural reforms and on additional fiscal consolidation measures to reduce debt, sustained reforms in the energy and financial sectors, improvements in the management of public investments, and the recently approved reform of the judiciary, which has implications for the investment climate and credit growth.

 

 

More Projects

Highlighted Project

The World Bank is supporting social assistance reforms in Albania through the Social Assistance Modernization Project. Social assistance and disability programs play an important role in poverty alleviation, and the initiated reforms aim to improve the equity and efficiency of these programs by ensuring that transfers go to the truly poor, vulnerable, and disabled. The reforms will help to modernize the administration by establishing a Management Information System (MIS) and to revamp the eligibility criteria of the two main assistance programs: social assistance, known as Ndihma Ekonomike (NE), and disability assistance (DA).

Initially, the project focused on three pilot regions: Durres, Elbasan, and Tirana. The NE MIS was established in 2014, and the previous eligibility criteria for social assistance that excluded most of the poor were replaced with a Unified Scoring Formula that incorporates variables associated with poverty. The revised criteria allowed for the better identification of poorer families, clearing the scheme from abusers and ensuring that transfers reach the poorest (more effective targeting and coverage of the poor), and also improved the transparency of benefits by eliminating preference.

As a result, about 24,000 genuinely needy families have benefited so far, and roughly 9,000 families have been removed from the scheme that did not meet the criteria, opening space for others who need the assistance. The new MIS has decreased some of the burdens on the applicants, reduced errors, and improved verification by automatically cross-checking information with other government databases (civil registry, Social Insurance, Employment Office, etc.).

The lessons learned from the pilot stage were used during the preparation for a nationwide rollout that will start in October 2016. Once the NE reforms are implemented nationwide, the coverage of the poorest is expected to increase by almost one-third of the baseline and the share of transfers going to the poorest to increase by about one-fifth.  

Reform of DA is also advancing through the development of eligibility criteria and an MIS. The revised criteria have been pretested with a series of consultations with various stakeholders. The pilot implementation of DA reform is expected to start in November 2016.


LENDING

Albania: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments