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Mitigating Risk, Ensuring Fiscal Sustainability in Albania

May 19, 2016


  • Albania’s economic growth and poverty reduction momentum were significantly slowed by the 2008 global financial crisis and the subsequent Eurozone crisis.
  • To mitigate risks to Albania’s macro fiscal stability, the Government received a EUR 200 million Guarantee from the World Bank which enabled financing to be raised from the private sector at highly attractive levels.
  • The subsequent resources alleviated the country’s funding pressure and debt roll-over risk in the midst of a volatile global financial market.

Roll-over risk is associated with the refinancing of debt and is commonly faced by borrowers when their debt is about to mature and needs to be rolled over into new debt. For example, if interest rates rise adversely, borrowers would have to refinance their debts at a higher rate and incur more interest charges in the future.

The country of Albania faced such a risk following the 2008 global financial crisis, and turned to the World Bank for assistance. The outcome was a EUR 200 million Policy-Based Guarantee that helped the Government raise EUR 250 million from international banks.

This was crucial for the country to reduce roll-over risks in relation to a EUR 300 million bond at a time when demand had declined for medium- and long-term Lek-denominated government securities in the domestic market. The Guarantee succeeded in meeting the Government’s funding needs and minimizing borrowing costs, saving roughly EUR 120 million in interest payments over the life of the loan compared to a standalone issuance.  

“The market was demanding a high premium to lend to Albania, without the World Bank Guarantee,” says Gianfranco Bertozzi, a Lead Financial Officer at the World Bank. “Albania’s cost of funding in the capital markets was over 7% at the time for the same maturity.”

Thanks to the Guarantee, Albania managed to raise EUR 250 million with a maturity of 10 years at EURIBOR + 1.3%, demonstrating how countries can use World Bank Group products to access cheaper funding with longer tenors from the private sector.

The Guarantee was part of a Development Policy Financing (DPF) series designed to address key risks to Albania’s macro fiscal stability. The risks included surging public debt (increasing from 54.7 percent in 2008 to 70.7 percent in 2013), an unsustainable pension system, and an energy sector that required sustained and increasing fiscal support from the government. Central government arrears amounted to more than 5 percent of GDP.

“It was critical for Albania to take steps to address arrears and fiscal risks. They were weighing heavily on its growth prospects and threatening to reverse the extraordinary achievements in poverty reduction made earlier,” says Doerte Doemeland, a Lead Economist at the World Bank. “We were also committed to supporting Albania as it embarked on a path of fiscal consolidation that was growth-friendly and socially sustainable.”

The Albania Public Finance DPF series also supported reforms aimed at increasing revenues, enhancing sustainability of the pension system, and reducing fiscal risks emanating from the energy sector.

Positive results have already started to materialize. Efficiency gains in the energy sector are helping to reduce (by half) the need for government guarantees to this sector. Moreover, all general government arrears have been cleared, benefitting more than 3,000 Albanians. And, nearly 5,000 Albanians now have access to the social pension.

Albania needed a significant amount of money to stabilize its finances, which created a challenge for the World Bank team: to mobilize the required amount of resources in a way that would not adversely impact the Bank’s lending envelope for the country. 

 “The Western Balkans have been the biggest recipients of Policy-Based Guarantees in recent times because the product optimizes the use of the Bank’s credit line, while helping countries to build capacity to access capital markets,” says Ellen Goldstein, Regional Director for Southeast Europe. “We are delighted to continue our partnership with the region to meet our clients’ growing needs.”

World Bank Treasury staff engage regularly with Finance Ministries on using World Bank financial products to achieve their development goals – relationships which allow them to gain insight into the specific risks and constraints that governments are facing and to identify the most appropriate financial product that meets their needs.

“We are pleased to play an important role in helping public sector borrowers secure affordable and competitive financing from the private sector in a challenging funding landscape,” says Arunma Oteh, Vice President and Treasurer for the World Bank. “As the Bank’s market-facing unit, Treasury leverages its triple-A credit rating and well-established relationships with private sector banks and investors to meet the needs of our clients.”

The Treasury issues US$50 to US$60 billion in bonds per year and manages approximately US$138 billion for the World Bank Group, central banks, national pension and insurance funds, and sovereign wealth funds as well as other multilateral organizations.

Furher reading:

World Bank Treasury

Financing and Risk Management

Financial Sector

Financial Crisis

World Bank in Albania