IBRD Results. Albania: Challenge. Albania s Impressive Growth THE WORLD BANK SYNOPSIS

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1 THE WORLD BANK Albania: Albania s Impressive Growth IBRD Results SYNOPSIS The past decade in Albania has been characterized by very rapid economic growth and substantial improvements in the welfare of the population. Once labeled as the continent s poorest country, Albania has enjoyed annual real economic growth rates of around 6 percent over the last decade, enabling it to graduate from the Bank s concessional lending arm (the International Development Association or IDA) and to join the ranks of the world s upper-middle income countries. In July 2010, Albania s gross domestic product (GDP) per capita stood at US$3,836, well above the IDA threshold. The last decade also saw important gains in the population s welfare evidenced by falling poverty rates and substantially improved MDG indicators. The Albanian economy has proven quite resilient in the face of domestic and exogenous shocks e.g., it was only one of two countries in Europe to achieve positive (albeit reduced) growth in the wake of the global financial and economic crisis. Challenge Albania has made important strides in reintegrating into the international and European communities after decades of isolation, and has been a contributor to regional stability in the Balkans. The country became a member of North Atlantic Treaty Organization (NATO) in 2008 and formally applied for European Union (EU) candidate status in 2009, after ratification of its Stabilization and Association Agreement, originally signed in Given the slower recovery in Europe and difficulties in Greece a major economic partner for trade, investment and remittances the next few years are likely to be less favorable than in the recent past. The key challenges to resuming high growth in this environment include: (i) the early resumption of a sound medium-term fiscal framework and further strengthening of public expenditure management; (ii) improving the implementation of Albania s already broad program of regulatory reforms to boost competitiveness and investment levels; (iii) continuing to close the infrastructure gap in a fiscally sustainable manner, and (iv) deepening the private sector s access to credit. Meanwhile, the slow recovery is likely to take its toll on the most vulnerable, necessitating a renewed attention to improving the effectiveness of social protection systems and safeguarding progress on social indicators. Finally, Albania is rapidly coming to terms with its climate change challenge as the second most vulnerable country in the Europe and Central Asia region primarily relating to the management of its water resources on which the country is heavily dependent for energy and agriculture. Albania is well on its way to achieving most of the Millennium Development Goals (MDGs), but remains an outlier among its European neighbors on most health and education indicators. Albania s position on the Human Development Index has improved steadily to a rank of 70 in 2009, in line with Western Balkans September 2010

2 2 ALBANIA S IMPRESSIVE GROWTH rankings, but significantly behind the rankings of the EU10 countries (countries accepted in EU during 2004) and Croatia for some indicators. As this suggests, Albania still has significant challenges to converge with regional standards in the areas of secondary enrollment, child and maternal mortality rates, and in access to safe drinking water. Approach To meet the above-mentioned challenges, the government of Albania, with support from the World Bank and other development partners, has identified three strategic objectives, as follows: Accelerating the recovery in Albania s economic growth through improved competitiveness by strengthening macroeconomic and public expenditure management, improving business regulations and reducing compliance costs, supporting local banks and competitive local companies, and improving key infrastructure services and their financial sustainability. Broadening and sustaining Albania s social gains by improving access to better quality education and health services, and increasing the effectiveness of its social protection systems. Reducing Albania s vulnerability to climate change, by improving the conservation, management and efficient use of its water resources, and strengthening disaster preparedness. Results Albania has made great strides over the last years and is considered an IDA success story. The World Bank has played a major role in supporting reforms, strengthening institutions, and financing investtments across a wide range of sectors. Albania graduated from IDA in 2008, and is now creditworthy for the International Bank for Reconstruction and Development (IBRD). Albania has had a successful performance in improving service delivery for poverty reduction in social sectors and rural development. Recent poverty results show an accelerated reduction of poverty rates in rural areas with headcount poverty declining from 24 to 17 percent during However, poverty remains highest in the rural mountain areas, although it has declined from 50 to 30 percent during Albania has also grown rapidly for much of the past ten years achieving a growth rate as high as 6.5 percent in 2008 before slowing again to a 2.3 percent in 2009, in the wake of the global financial and economic crisis. Nonetheless, the fact that Albania was able to continue growing through 2009 is in itself remarkable, especially when viewed against the backdrop of other Europe and Central Asia region economies, which for the most part suffered declines in GDP. Indeed, Albania was one of only two European countries that was able to maintain positive growth throughout the current global recession. The World Bank Group (WBG) program during was instrumental in supporting the creation of a number of important building blocks on which to move future progress. Public expenditure management: The Bank has supported reforms in public expenditure management and establishment of a modern corporate financial reporting framework through extensive analytical work and public sector modernization projects including: (i) enactment of a new budget law, procurement law and public investment management procedures, (ii) the new Territorial Planning Law and ongoing support for land registration, and private sector development, (iii) improved regulation and supervision of insurance and microcredit institutions, (iv) new Auditing law, and (v) amendments to the Company law with focus on shareholder rights Energy Sector: The successful privatization of the electricity distribution company in 2009, supported by transaction advice by the International Finance Corporation (IFC), and with a World Bank Partial Risk Guarantee, was a critical reform that is expected to increase the reliability of electricity supplies and ease fiscal pressures in the future. The World Bank, together with the European Bank for Reconstruction and Development (EBRD) and European Investment Bank (EIB) has supported the construction of the Vlora Thermal Power Plant, which represents the first significant investment in domestic power generation

3 IBRD RESULTS 3 in over 25 years in Albania. Furthermore under the Dam Safety Project, the Bank will contribute to further increases by increasing the efficiency of the cascade of dams on the Drini River, which are responsible for the largest share of domestic generation., Private sector development: Domestic private investment increased from 19 percent of GDP in 2005 to an estimated 21 percent in 2009 mostly in the construction sector. As measured by Doing Business indicators, Albania moved from the 136 th ranking in 2007 to 82 nd in 2010 and achieved the second-highest rank among the top ten reformers worldwide in 2009, supported by the Bank s advisory services. The improved ranking was predicated on significant reductions in the time (from 36 to 5 days between 2008 and 2010) and cost of registering a business, trading across borders and improvements in the regulations for getting credit and protection of shareholders (disclosure index rose from 0 in 2008 to 8 in 2010 and investor protection index rose from 2.7 in 2008 to 7.3 in 2010). Transport sector: The Road Maintenance Project contributed to reducing the roughness index from 10 for national roads and 19 for rural roads to 5 and 8, respectively. Road accident fatality rates in Albania declined from per 10,000 registered vehicles in 2000 to 8.64 at the end of Road safety barriers at various locations in selected national roads were installed and 60 black spots (hazardous areas) were improved. Under the Secondary and Local Roads Project, the Bank is financing rehabilitation/improvement of secondary and local roads. About 110 km of secondary and local roads are in the process of reconstruction and rehabilitation. The project has helped catalyze around US$400 million in commitments from other external partners for rehabilitating and improving an additional 1,000-1,500 kilometers of the secondary and local roads network. Infrastructure in areas with tourism potential: Under the Municipal Water and Wastewater Project, the Integrated Water and Ecosystem Management Project and the Integrated Coastal Zone Management and Clean-Up Project (ICZMP), the Bank supported significant improvements in water supply and investments in sewerage and wastewater treatment. As a result, the continuity of water supply was increased respectively in Durres, from 2.1 hours in 2003 to 3.3 in 2008, in Fier, from 6.2 to 18 hours, in Lezhe from 20 to 21 hours and in Saranda from 1.8 to 6.3 hours. Moreover, the collection rate increased by an average of 2.5 times in all cities. Under the ICZMCP, three coastal municipalities and twelve coastal villages benefited from small infrastructure projects. These included several access roads to the beach or historical monuments (castle and monastery), repairing or extension of water supply systems and sewage water collection, as well parking places and rehabilitation or re-surfacing of village roads. Improvements include: equitable new water supply constructed for more than 400 families in Gjilek; water supply rehabilitated for 167 families in Vuno; equitable water supply constructed for all 315 families in Piqeras; a new 1.3 kilometer road in Orikum for daily tourists; etc. Agricultural sector: Under the Water Resources Management Project, 36,000 hectares (ha) of land were returned to irrigation, and over 34,500 ha were drained. In addition, 33 dams and reservoirs were rehabilitated. The rehabilitated dams and reservoirs improved the irrigable land downstream by about 6,860 ha. Under the Agricultural Services Project, the IDA supported a competitive grants program, which provided grants of up to US$15,000 to farmers for using new technologies and accessing new markets. One hundred thirty-four (134) farmer groups grant-financed projects were implemented and over 21,000 farmers were exposed to improved technology. Around 85 percent of the direct beneficiaries obtained increases in annual income, with 30 percent showing increases of greater than 10 percent. The diversity of agricultural products traded increased from an average of 5 product varieties in 2004 to 28 in 2008; six key fishing ports were rehabilitated and management plans adopted. Education: Bank support for education was channeled through the Education Excellence and Equity Project with positive results. Between 2005 and 2009 enrolment rates at every level increased: for example, from 48 to 50 percent in early childhood development services, from 54 to 60 percent in secondary education and by more than 20 percent for higher education. New curricula have been introduced in basic and secondary education. An Information and Communication Technologies (ICT) curriculum was introduced in 2009, all ICT

4 4 ALBANIA S IMPRESSIVE GROWTH teachers have been trained, and over 2,000 basic and secondary schools have been equipped with computer labs. Environment: Under the Natural Resources Development Project (NRDP), erosion reduction measures have been established and erosion reduction is estimated at 150,000 tons to date. The target for 2010 is to reduce erosion by 200,000 tons. Bank Contribution Commitments under the current portfolio include US$263 million in IBRD/IDA loans and credits, US$180 million in co-financing loans and credits, and US$35 million of recipient-executed Trust Funds (TF), amounting to a consolidated portfolio (under Bank supervision) of around US$480 million of investments under implementation. Partners The WBG is the second largest donor to Albania after the European Commission (EC), with annual disbursements of around US$60 million per year. A significant share of the commitments in the current Bank portfolio is co-financed with other partners, at a ratio of 0.8 in co-financing to each dollar of Bankfinancing, i.e. around $215 million in co- or parallelfinancing for around $260 million in IDA/IBRD loans and credits. This includes the Education Excellence and Equity Project (a sector wide approach) and the Secondary and Local Roads Project in which there is US$20 million from IDA and US$15 million in co-financing from the Organization of Petroleum Exporting Countries Fund for International Development (OFID), the centerpiece of a program of parallel financing for feeder roads reconstruction of around US$430 million. The Bank is also managing a US$6 million Multi-Donor Trust Fund for public sector management financed by a group of seven donors, and an innovative fee-based service arrangement with Albania s One UN (United Nations) Program. Integration with the European accession agenda. EU-related reforms are expected to receive greater attention over the next few years, and the Bank has been providing relevant assistance where appropriate. The Bank will follow these developments closely and be prepared to engage further on important reforms, particularly in governance, public financial management, and fiduciary matters, as well as in the central areas of the new Country Partnership Strategy (CPS). Moving Forward During this CPS period, the Bank expects to expand and deepen the sub-regional focus in the Western Balkans and South East Europe. Already Albania has and is benefiting from projects in the regional Trade and Transport Facilitation in South East Europe program and the Energy Community of South East Europe. In addition, Albania will continue to benefit from a move towards regional economic and sector work (ESW) as a means of utilizing available World Bank resources for knowledge generation. Key areas in this regard include poverty analysis, social policy, transport, water, climate change and financial sector. Going forward, new priorities could be added, based on client demand and the amenability of the topic/sector to a regional rather than a country approach. The CPS program will also continue to support governance improvements in Albania by refining the Governance Filter (initially developed in fiscal year ) to focus on a clear set of requirements for Bank-financed projects aimed at deepening the impact on the public expenditure management, administrative efficiency, fiduciary and public disclosure practices across government ministries.

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