Albania strategy overview

Full strategy  (0.5Mb) Approved 17  Nov 2009

Summary of public comments  (0.1Mb)

Albania continues to fulfil the conditions specified in Article 1 of the Agreement Establishing the Bank.

Albania has continued to make progress on key structural and institutional reforms, geared towards integration into the EU and other Euro-Atlantic institutions. It is among the first in the Western Balkans region to have its Stabilisation and Association Agreement (SAA) with the EU ratified by all member states and consequently enter into force. Albania’s efforts in EU approximation culminated with its formal application in April 2009 for EU membership. However, significant institutional and economic reform challenges remain, and the Bank aims to assist the country in meeting these challenges successfully over the Strategy period.

Macroeconomic environment

A favourable macroeconomic environment in recent years has been one factor resulting in strong GDP growth averaging about 6.3 per cent annually between 2005 and 2008. Growth has been driven mainly by the services and construction sectors. Sound economic policies and Albania’s still limited integration into global markets have helped to mitigate the negative impacts of the global financial crisis. However, the financial crisis brought about a contraction in exports (minus 17.2 per cent y-o-y in the first half of 2009), lower remittances (at around 10 per cent of GDP in the first quarter of 2009 down from 15 per cent in 2007/08), and reduced foreign investments; all of which are likely to contribute to significantly lower – albeit still positive – growth in 2009-2010. The banking sector has been less affected thus far than other countries due to Albania’s lower level of financial integration, improvements in regulation and supervision and a relatively high level of liquidity and capitalisation. On the other hand, lending has become more conservative and banks are showing increasing concern about the quality of loan portfolios, which has a negative impact on the availability of financing for businesses, especially SMEs.

Financial crisis response

The government has responded to the crisis through the provision of liquidity, regulatory measures (such as an increase in the deposit insurance ceiling) and continuing investment in infrastructure which is providing economic stimulus. As a result of the higher spending, the 2008 budget deficit increased to 5.5 per cent, up from 3.5 per cent in 2007, and could be slightly above this level in 2009. Key macroeconomic challenges include trade and current account deficits (the former above 25 per cent of GDP) in an environment of falling remittances and foreign investments. Fiscal risks remain high and are linked to lower than projected revenues and continued high government subsidies to underperforming state owned utilities – water, power generation and transmission.

Policy reforms and business environment

Policy reforms and progress in European integration have helped to improve Albania’s image as an investment destination and help contribute to a favourable economic outlook in the medium term. The business environment however continues to suffer from a high level of corruption, serious shortcomings in the judiciary and weak institutional and law enforcement capacity. Despite sizeable investments in recent years, infrastructure remains an obstacle to private sector development, including a transport network in need of further upgrading, lack of reliable power supply, and limited regard paid to environmental consequences of rapidly expanding economic activity. Despite progress achieved since 2005, poverty remains widespread, particularly in rural areas, which encourages continued emigration.

Transition achievements and challenges

Albania has made progress on its transition path since the approval of the last Country Strategy, exemplified by several upgrades of the EBRD transition indicators. In 2006, successful implementation of simplified business registration procedures and further cuts in enterprise subsidies have led to an upgrade of the enterprise-related governance and restructuring indicator. In 2007, the privatisation of the fixed-line telecommunication company, Albtelecom, and significant improvements in sectoral regulation led to an upgrade in the telecoms indicator. In 2008, the privatisation of the oil refinery ARMO and the electricity distribution company led to an upgrade of the indicator on large-scale privatisation, while effective implementation of the new banking law and increased transparency in the sector following the establishment of a new Credit Registry led to an upgrade of the indicator on banking reform.

The main transition challenges over the next strategy period are to:

• Strengthen state institutions: public administration and civil service reform, particularly increased efficiency and impartiality of the judiciary and an effective and systematic fight against corruption; further improvements in the investment climate for domestic and foreign companies, including resolution of land titling and ownership, and improvement of land registration procedures;
• Invest in infrastructure, including upgrading of the national, regional and local road networks, modernisation and expansion of seaports, and improving energy security; increase efforts to commercialise water and waste utilities as well as urban transport, while giving greater fiscal autonomy to municipalities which could plan and invest in these sectors; expand the independence and capacity of regulators of key utilities (power, telecoms and waste and water companies) to promote competition and investment;
• Further strengthen the banking system, support SMEs/MSEs and bank financing of these companies to improve competitiveness in order to reduce Albania’s very high dependence on imported goods and enhance export opportunities; and support the development of the non-bank financial sector, including further enhancing the supervisory capacity of the Financial Supervisory Authority

The Bank has played an increasing and important role in the transition process in Albania: Since initiating operations, direct Bank financing was above EUR 500 million, with a further EUR 1.1 billion from sponsors and co-financiers. The Bank, working in close conjunction with other IFIs and donors, will seek to further increase its activities and impact over the strategy period through focusing selectively on identified challenges. The Bank is prepared to respond to the negative impact of the financial crisis, in particular by providing equity and debt funding to the banking system as well as risk sharing products to boost local banks’ lending to the real sector. The Bank also intends to continue supporting key government infrastructure projects. In addition, the Bank is providing direct equity and debt investments with export-driven local enterprises through dedicated products, such as the EBRD-Italy Local Enterprise Facility (LEF).

Infrastructure, Energy and Municipal and Environment Projects: The Bank will continue to support investments in transport and energy, with emphasis on regional linkages, regional integration and energy security. Using the Tirana Airport as a model, the Bank will encourage government to consider further PPPs and concessions to attract private capital in power, ports and municipal utilities (water, waste). Where possible, the Bank will finance infrastructure following privatisation, such as in the power and telecoms sectors. Further improvement to basic infrastructure, such as roads, is also necessary. The Bank will continue to support joint donor and IFI initiatives.

Enterprise Sector: The Bank continues to be seen as the leading institution to support competitive businesses and in particular larger investors, both domestic and international. The Bank will respond flexibly to support existing and new high quality investors who may not be able to finance their investments due to the worldwide financial crisis. Given the low level of foreign direct investments, the Bank will further expand its efforts to reach small and medium size companies either directly, through LEF and the new EBRD Western Balkans Sustainable Energy Direct Financing Facility (WeBSEDFF), or in complement with local banks through products such as the Medium Size Co-Financing Facility (MCFF) and the Western Balkans Sustainable Energy Efficiency Credit Line Facility (WeBSEECLF). Special attention will be devoted to companies which are implementing energy efficiency and/or sustainable energy investments and also those developing in the IT sector.

Financial Sector: In light of the world financial crisis, the Bank is prepared to respond with financial products tailored to needs of local banks, including risk sharing facilities, equity, quasi equity and debt investments coupled, where possible, with donor funded subordinated resources to support among others, SME and MSME development and energy efficiency. The primary objective is to strengthen banks’ capitalisation, to support lending activities to the real economy, which is starting to feel the effect of credit tightening and higher risk aversion from local banks. The Bank will contribute to the development of the non-banking financial sector.

Outlook

The Bank will reinforce policy dialogue efforts in all sectors, with a focus on addressing legal and regulatory issues that arise from specific project experience. As in the past, the Bank will coordinate its activities with other IFIs and donors, especially in the context of the new Western Balkans Investment Framework (WBIF) together with the EC, EIB, CEB and bilateral donors. The Bank is an active participant in the donor coordination effort and supports the goals of the Paris Declaration on Aid Effectiveness, which are designed to improve delivery of assistance. In this regard, the Bank expects to work with donors and the government to link TC and grant co-financing to its priority investments in transport, energy and municipal projects.

The Bank will continue to ensure that all of its operations in Albania are subject to the environmental and social commitments in the applicable policy (2003 Environmental Policy or 2008 Environmental and Social Policy), and incorporate, where appropriate, Environmental and Social Action Plans.