Overview

Strategy

The most recent World Bank Group program in Albania was guided by the Country Partnership Framework (CPF) for FY15–20, which provided analysis, advice, and financing in support of equitable growth in Albania and integration into the European Union (EU). The CPF focused on three main areas:

• restoring macroeconomic balances
• creating conditions for accelerated private sector growth
• strengthening public sector management and service delivery

More than 80 percent of the program has already been delivered. In September 2020, a Country Program Adjustment Note laid out an interim strategy for the Bank to help support the Government’s main priorities and was adjusted to respond to the earthquake as well as COVID-19. The ongoing Health System Improvement Project will be restructured, and additional financing will help respond to the Government’s request for hospital reconstruction in the areas affected by the earthquake (Laci Hospital is being reconstructed as a result of these efforts). The Emergency COVID-19 Project was approved by the Board on July 30, 2020. More than 60 percent of the procurement will be carried out by the UN Office for Project Services. A new CPF for Albania will be finalized after the general elections at the end of April 2021.

A Fiscal and Growth Development Policy Loan in the amount of US$80 million was disbursed by end-March 2021. The operation focused on critical reforms to support restructuring and a resilient recovery. This operation also aimed to help the country crowd in and leverage private sector financing by providing an anchor for critical structural reforms and acting as a signal of Albania’s continued commitment to fiscal sustainability and growth.

Albania does not have a comprehensive strategy or plan for financial resilience to address major disasters and shocks. When financing is unavailable or access is delayed, disaster impacts can be unnecessarily high, worsening economic slowdowns and poverty and leading to budget volatility. Therefore, a strategic approach is needed to tackle financing gaps in the long run and in a sustainable way. 

Funding gaps following disasters in Albania could be significant and will likely be covered through ex post funding, such as budget cuts. In January 2021, jointly with the Ministry of Finance and Economy (MOFE), the World Bank completed a diagnostic on disaster risk finance in Albania, estimating that earthquakes and floods could cause on average US$147 million in damages per year. Earthquakes will have the biggest impact; damages from a major earthquake, such as one with a recurrence interval of 100 years, could exceed US$2 billion. Due to the limited pre-arranged financing in place, the funding gap could exceed on average US$130 million each year.

Based on the findings of the diagnostic, the Government, led by the MOFE, decided to take several steps to strengthen financing preparedness, including by developing a Disaster Risk Finance Strategy. This strategy will set out the policy framework to improve the Government’s approach to financing disaster-related contingent liabilities. It outlines the Government’s main priorities in managing contingent liabilities from disasters while minimizing threats to fiscal stability, economic and social development, and citizen wellbeing.

Last Updated: Apr 07, 2021

RECENT ECONOMIC DEVELOPMENTS

Two significant shocks that have recently hit the economy—the devastating 2019 earthquake and the COVID-19 pandemic—dominate the stage of recent economic developments. As the country started its reconstruction phase, the global pandemic forced it to put key economic sectors in lockdown, and the economy experienced a sharp contraction of 10.2 percent in the second quarter of 2020. The travel and tourism services were among the first sectors hit. Sales, profits, and employment losses disproportionately affected small and medium-sized enterprises (SMEs). Unemployment rose to 11.9 percent in the second quarter of the year.  

Social distancing measures were lifted in the summer and employment bounced back, with tourism and reconstruction partially absorbing the job losses in manufacturing. Despite the employment recovery, economic activity continued to contract by 3.4 percent in the third quarter of 2020. Private consumption and investment declined sharply, as the number of infections consistently rose during the year. Declining garment processing orders led to a sharp decline of 6.7 percent of goods exports, while tourist visits decreased by 60 percent.  

Poverty (at US$5.5 per day) is estimated to have increased in 2020 by 1 percentage point, equivalent to 28,000 new poor. Response measures included increased social assistance benefits, wage subsidies, credit guarantees to ease salary payments, and working capital, which are estimated to have prevented a further poverty increase of about 1.8 percentage points. Tax deferrals and further value added tax exemptions were introduced to help SMEs, while public spending rose to 33.7 percent of GDP and public revenues slumped to 26.7 percent, despite large grants financing reconstruction. 

ECONOMIC OUTLOOK

Tourism and travel are likely to remain limited until the global vaccination rollout is completed. In the baseline scenario, GDP is forecasted to grow by 4.4 percent in 2021 as exports, consumption, and investment partially rebound. The services sector, led by tourism, and construction are expected to be key drivers of the recovery, in part thanks to reconstruction investment, following evidence from similar disasters in developing economies. Private investment will contribute to growth, provided that the Government continues to implement business climate reforms. Beyond 2021, government spending will likely be constrained by the limited fiscal space.  

The current account deficit is expected to narrow to 8.8 percent of GDP in 2021 and further decline to 6.5 percent in line with pre-crisis trends, driven by projected improvements in the trade balance. Service exports, including tourism and fast-expanding business process operations, should narrow the trade deficit over the medium term. Import growth will be high at 13 percent in 2021, as infrastructure investment speeds up.  

With economic activity picking up, revenues are projected to recover to 27.6 percent of GDP by 2022–25. Albania’s public debt is projected to gradually decrease over the medium term. 

Last Updated: Apr 07, 2021