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OPINION June 2, 2020

Interview with World Bank Country Manager for Albania on Social and Economic Impacts of COVID-19

This interview was originally published in the Monitor magazine on May 29, 2020.

Q: The World Bank predicted the Albanian economy would shrink by 5% during 2020, one of the sharpest in the region. Why such pessimism?  

Maryam Salim: Along with much of the rest of the world, Albania was forced this Spring to take unprecedented public health measures to slow down the spread of COVID-19. And this, we cannot forget, was soon after the destructive earthquake in November 2019. The freezing of large parts of the economy has plunged Albania into a severe recession. A range of factors make Albania especially vulnerable to this crisis:

First, tourism is a particularly important sector for the Albanian economy – and is expected to contract sharply due to COVID-19.

Second, Albania has close ties with the Italian economy, which has been particularly hard hit by this crisis.

Third, this is a global shock that is disrupting remittances from the diaspora – which is an important source of financing for Albania.  

Fourth, informal workers are particularly at risk during this crisis. Their jobs are less secure and their access to social safety nets is more limited. Unfortunately, informality is particularly widespread in Albania.

However, there is unusually high uncertainty around economic forecasts during this period. The severity of the downturn will depend on how effectively the pandemic can be contained over the coming months, the speed with which public health restrictions can be relaxed, and the extent to which economic life can normalize. The World Bank will remain a strong partner and support Albania every step of the way.

Q: What should the Albanian government do in order to mitigate the risks of Covid-19 to the economy?

Maryam Salim: In suppressing the first wave of infections, Albania rightly focused on enforcing the lockdown while providing liquidity to businesses and households to preserve livelihoods.

As Albania now comes out of lockdown, it is crucial to gradually move towards a public health model that continues to prevent re-emergence of COVID cases, but also allows economic life – even if under continued physical distancing requirements - to resume. Earthquake reconstruction needs to continue and can provide stimulus to support the recovery. Measures that will enable tourism this summer can ensure that this year’s season is not entirely lost for Albania. Financing instruments - such as credit guarantee schemes - can unlock credit that will enable businesses to relaunch over the coming months.

As the recovery gains traction, Albania needs to proceed with structural reforms that can lead to better medium-term growth performance. These include strengthening the rule of law, ensuring macro-fiscal sustainability, improving the business environment, and improving public services to boost human capital.

Q: How do you evaluate the supporting package from the Albanian government compared with other Western Balkan countries?

Maryam Salim: Given the economic freeze, economic policy measures to preserve jobs and provide support to those in need are crucial. Albania recognized this early on in the crisis and adopted its first and second economic policy packages swiftly. These measures, if designed and implemented effectively, should help cushion some private sector losses, improve business liquidity, and support affected households. However, given the uncertain length of this crisis, policymakers everywhere face the same dilemma: using all available fiscal space to mitigate the immediate impact can backfire if the crisis endures. Policy responses should therefore be calibrated to mitigate the immediate effects and adjust to new realities that may emerge, but also leave space to prepare the economy for a recovery.

Q: How do you forecast the recovery of the Albanian economy, (how long it will take, what consequences for employment, poverty etc…)?

Maryam Salim: Let me first emphasize again that economic forecasting is associated with particularly high uncertainty during this period. Much will depend on the course of the pandemic, the speed with which public health restrictions can be relaxed, and the extent to which economic life can normalize. In our baseline scenario, we expect the recovery to start in the second half of 2020 and stretch into 2021. Continued public health restrictions – as well as demands from customers and workers for continued physical distancing - will mean that many businesses will be disrupted and will need to find new ways to operate. Economic uncertainty may linger and may delay new investments. Many workers have lost their jobs and will need to find new employment. This means that, while the lifting of the most severe public health restrictions will provide an immediate boost to the economy, full recovery will take more time.

Encouraging developments in the labor market through accelerated job creation and wage growth indicated that Albania had been making slow but steady progress in reducing poverty since 2014. But the 2019 earthquake and the COVID-19 pandemic seriously derailed this process. Simulations produced by the World Bank estimate that poverty in Albania could go up by 4‒8 percentage points, back to levels not seen since the global recession. This increase in poverty is mainly the result of urban workers in services losing a significant share of their earnings because of unemployment or low demand.

Q: What should we do in order to turn this crisis into an opportunity, once it is over?

Maryam Salim: This crisis is first and foremost an enormous tragedy, affecting the lives of many. But there are indeed also some opportunities.

First, coming out of this crisis, we need to put renewed emphasis on building resilience against future shocks. Strong public finances during good times are what enable governments to deploy economic support in bad times. A solid financial system is needed to provide the private sector with liquidity. A more diversified economy can help reduce the impact of shocks that affect some sectors more than others.

Second, this crisis is an opportunity to build back better. For instance, physical distancing means that many more households and businesses have turned to online markets over the last few months. This was a big step for the digital economy and this needs to be further leveraged during the recovery.

Third, this crisis is an opportunity for renewed emphasis on social solidarity. Once again, this crisis has particularly hurt the most vulnerable – who often work in informal jobs that require in-person interaction. When they lose their jobs, they have limited savings to fall back on and they often have difficulty accessing social safety nets. In the upcoming recovery, it will be crucial to help the poor gain access to formal and better paid jobs. Social safety nets need to be strengthened to effectively support households in times of need.