The World Bank in Albania

Country Context

Albania is implementing important structural reforms that will support equitable growth, 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 promote faster growth. 

The Government’s focus has been on recovery from the pandemic and the devastating earthquake of November 2019. Sustaining the pace of reforms under these circumstances has been challenging. 

A robust recovery took place in 2021 in Albania thanks to a policy stimulus and the resurgence of travel, construction, and extractive activity. Private investment, consumption, and public spending drove growth, while public debt remained high. Rising inflation and the war in Ukraine threaten economic and poverty prospects in 2022.

The World Bank and other partners are cooperating to support the Government in overcoming these challenges and implementing the country’s longer-term vision. 

Last Updated: Apr 18, 2022

Strategy

The World Bank Group program in Albania is guided by the Country Partnership Framework (CPF), which provides analysis, advice, and financing in support of equitable growth in the country and integration into the European Union (EU). Due to the pandemic and the general elections in 2021, the CPF for FY2015–20 was extended for two more years. The strategy focuses on three main areas: restoring macroeconomic balances; creating conditions for accelerated private sector growth; and strengthening public sector management and service delivery. 

More than 85 percent of the program has been delivered. The ongoing portfolio is supporting the Government’s main priorities, including the needs that emerged from the 2019 earthquake as well as COVID-19.

The ongoing Health System Improvement Project has been restructured, and Additional Financing will help respond to the Government’s request for hospital reconstruction in the areas affected by the earthquake. A US$35 million Additional Financing for the Project for Integrated Urban and Tourism Development was approved in October 2021 and will be used to support the scale-up of investments in two new locations in southern Albania: Ksamil and Orikum, both of which are closely connected to municipalities that are already participating in the parent project. The investments will focus on upgrading urban areas, improving infrastructure, and strengthening the tourism market and product development in light of the changes in scope and demand due to the COVID-19 crisis.  

Albania is endowed with ample water resources. The total irrigated area in Albania is roughly 79.2 percent of the land under cultivation. Currently, 1 billion cubic meters of water is needed per irrigation season to irrigate 360,000 hectares. Due to climate change, the demand for irrigation water is expected to be 1.5 billion cubic meters of water storage per season. Irrigation and drainage infrastructure are uniquely vulnerable to various climate change–induced hazards, such as floods, droughts, and seawater intrusion. Moreover, floods, droughts, and heat waves are expected to be the greatest risk to crop yields.

The sector is constrained by a host of challenges, including a backlog of infrastructure rehabilitation and modernization needs, poor marketing, weak organization of farmers, lack of access to credit, low development of agro-food processing, and so on. There is a need to modernize the country’s heavily degraded irrigation and drainage infrastructure. It is equally important for Albania to break the vicious cycle of a “rehabilitate-neglect-rehabilitate” syndrome by ensuring regular maintenance of infrastructure and enhancing agricultural competitiveness. 

To improve climate resilience and ensure the revival of the rural economy, the report proposes five interventions areas: (i) modernizing irrigation and drainage infrastructure, (ii) enhancing resilience to flood risks, (iii) supporting agricultural value chains and private irrigation, (iv) investing in institutions, information, and knowledge, and (v) introducing green and environmentally sound farming and irrigation practices. 

Last Updated: Apr 18, 2022

RECENT ECONOMIC DEVELOPMENTS

Higher consumer confidence, increased demand for Albanian exports, and fiscal stimulus supported the strong growth recovery in 2021. Growth in trade and construction—the latter connected to reconstruction and new infrastructure projects—contributed the most. Jobs did not increase in 2020–21: there were over 16,000 fewer employed people in 2021 than in 2019. The real wage increased by 3.7 percent in 2021, while the minimum wage increased by 13.1 percent in real terms. Still, given the strong growth in GDP per capita in 2021, poverty is estimated to have dropped significantly from 31.4 percent in 2020 to 22 percent in 2021. Inflation rose rapidly during the fourth quarter of the year, reaching 3.7 percent in December 2021. Food prices increased by 3.9 percent in 2021, close to double the increase of the overall basket. This will hurt the bottom 40 percent, whose food consumption is over half of total consumption. The Central Bank kept the policy rate unchanged but recently announced an expected tightening through 2022. Higher tax revenues and new debt allowed the Government to increase infrastructure spending. The Government also raised subsidies to the energy state-owned enterprises (SOEs) to ensure an energy supply during the last quarter of 2021.  

ECONOMIC OUTLOOK

The baseline scenario projects economic activity to expand at its pre-pandemic, pre-earthquake historical rate. However, the war in Ukraine could further increase inflation, disrupt supply chains, disturb financial markets, and undermine confidence, all of which could dim Albania’s growth prospects. In turn, a sluggish job market, combined with diminished purchasing power, could dampen poverty reduction.

Government spending is expected to decline gradually in line with fiscal consolidation plans. However, higher spending may be needed to guarantee the energy supply through more costly energy imports and support to the fragile energy SOEs. Service exports, including tourism and fast-expanding business-process operations, should return to their pre-pandemic growth trends. 

Public debt is expected to decline slightly to 78.1 percent of GDP in 2022 and more significantly over the medium term. However, the fiscal balance could further deteriorate in a worsening international context, forcing the Government to cut capital spending to prevent a hike in the debt-to-GDP ratio.

In the coming years, private consumption is projected to return as the primary driver of GDP growth. Private investment could provide further support to growth if business climate reforms are implemented. A key medium-term reform priority is the need to boost revenue collection and achieve fiscal consolidation. 

Last Updated: Apr 18, 2022