Albania needs to accelerate structural reforms by improving the quality of governance and rule of law, strengthening the quality of human capital (education and skills) and overcoming infrastructure bottlenecks, in particular in the power sector, says the World Bank
TIRANA, Nov. 25 – Supporting and strengthening the fragile recovery and growth in Albania requires a shift from domestic demand driven growth to export-oriented growth, says the World Bank in its recommendations to the new Albanian government out of the June 23 general elections. In its set of policy briefs intended to serve as input to the new government’s program of reforms, the World Bank suggests fiscal consolidation to reduce public debt over the medium term as a priority for macroeconomic stability and growth. Public debt expected to climb to 69 percent of the GDP by the end of the year, unpaid government bills and arrears at around 400 million euros and bad loans at 25 percent are considered the major threats to the Albanian economy which has been suffering escalating spillover impacts from the Eurozone crisis and top trade partners Italy and Greece.
With fiscal space exhausted and the role of the monetary policy circumscribed, little can be done at present to revive domestic demand through macroeconomic policies. The fiscal consolidation will need to be accompanied by a fiscal rule to put in place a new fiscal anchor as well as strengthen the financial discipline, say World Bank experts. “For growth, the way forward must be to tap external demand which for a small economy like Albania remains an important source of growth. For this, Albania needs to accelerate structural reforms in at least three areas: improving the quality of governance and rule of law; strengthening the quality of human capital (education and skills) and overcoming infrastructure bottlenecks, in particular in the power sector,” says the World Bank.
Since the 2008-09 global financial crisis, economic growth in Albania has remained subdued. After a pre-crisis decade with a 6 percent average growth rate, growth fell to 3.3 percent in 2009. The crisis led to lower remittances and other flows, which in turn, contributed to lower growth, particularly in the construction sector, which has seen a sharp decline. GDP dropped to 3 percent between 2009 and 2011, mainly relying on basic services and the extractive industries that reached out to markets outside the European Union. Growth weakened further in 2012 to 1.6 percent, reflecting the double dip recession in the Eurozone. The World Bank says the global financial crisis of 2008 brought to an end Albania’s growth model based on domestic demand. Although it has been able to avoid recession, Albania was hit hard by the crisis. The Eurozone crisis further compounded the challenge of recovery. With its close links to the Greek and Italian economies via exports, remittances, and financial flows, Albania has borne the brunt of the Eurozone sovereign debt crisis. Domestic demand has remained weak, and with the Eurozone crisis lingering, growth in Albania is projected to remain modest, averaging just 2 percent between 2013 and 2016.
Shift to exports
Exports have been one of Albania’s key sources of growth during the past four years of the global crisis years, significantly contributing to Albania’s moderate growth rates of an average of 3 percent compared to an average of the 6 percent in the pre-crisis years. A report published by the country’s state Institute of Statistics on the performance of exports during the 2008-2012 period shows that except for the slight decline of 6 percent in the onset of the global financial crisis in 2009, Albania’s exports registered strong double digit growth rates of 54 percent and 22 percent in 2010 and 2011 before slowing down to 8 percent in 2012, according to the country’s state Institute of Statistics INSTAT.
Garment and footwear products were Albania’s key exports from 2008 to 2011 but were overtaken by exports of ‘minerals, fuels and electricity’ in 2012.
Data show the EU accounted for three-quarters of Albanian exports in 2012, the Western Balkan countries for 12.2 percent and the rest of the world for 12.3 percent.
Priority areas
The World Bank has prepared a set of policy briefs on thirteen selected priority issues for Albania’s economic and social development intended to serve as input to the new government’s program of reforms and encourage dialogue among various stakeholders.
The briefs encompass a range of topics, which are high on the government agenda, such as macroeconomic policies, financial sector strengthening, pension reform, health and education, poverty monitoring and social protection, gender equity and social inclusion, land reform, power sector development, transport infrastructure, water resources, and environment and waste management. Each brief presents an overview of the issues, main achievements to date, including with support by the World Bank financed projects, the unfinished agenda ahead, and a number of recommendations and policy options for the way forward.
“Through this work, we wanted to help the new government – and the public at large – to take stock of the ongoing reforms and results they have achieved, identify gaps and bottlenecks, and develop priorities for action that are informed by lessons from relevant experiences in Albania and elsewhere. We are very encouraged by the interest that the government, at the highest level, has shown in our analyses and recommendations. I would like to acknowledge and thank a large number of Bank staff who contributed to various briefs. This collective work also provided a good basis for discussing priorities for future World Bank support,” said Kseniya Lvovsky, outgoing Country Manager for Albania, who initiated and coordinated the production of the briefs.
Gov’t new growth agenda
In its 2013-2017 programme, the Socialist Party-led government recognizes the limitations of the development model based on a remittances-fueled construction boom and raw material exports, and aims to shift the focus to new sources of growth by identifying manufacturing, energy, tourism and agribusiness as priority areas. The programme also pledges fiscal discipline and the payment of accumulated public arrears.
“The end of the 22-year transition period and the economic and financial crisis has put the country in front of an undisputed fact. The current economic growth model in Albania, mainly supported on income from remittances, donations as a poor and developing country, soft loans and foreign assistance were an important driver which regularly supplied the Albanian economy. The massive privatizations which gave the Albanian budgets the luxury of being in equilibrium and at minimal deficits and self-employment mainly in agriculture, the 15-year boom in construction, and the reduction of unemployment through immigration seems to be heading to total or partial exhaustion,” says the SP-led left-wing coalition in its new programme for the 2013-2017 term.
“We are clear on the key development goals and the model of economic growth for the next 15 to 20 years. We will build the profile of the Albanian economy in the next two decades identified through several priority sectors such as manufacturing, energy, tourism, agriculture and agri-industry, education and services. We will draft more structured and well-addressed policies to promote maximum economic growth, increase domestic production and exports, and massively open new jobs,” says the winning left-wing coalition in its programme.
The Socialist Party plans to apply progressive taxation on personal income and corporate income starting from 2014, a move which has been opposed by the business community favouring the current 10 percent flat tax in force since 2008.
The Albanian economy grew by only 1.35 percent in the first half of this electoral year and is expected to grow at around the same levels of 2012 when at 1.6 percent, Albania registered its lowest annual GDP growth rate since the collapse of the notorious pyramid schemes in 1997, and almost half of the average 3 percent growth rate during the global crisis year from 2009 to 2011.
