PRIORITIES FOR EQUITABLE GROWTH IN ALBANIA

Ellen Goldstein Country Director South Eastern Europe

January 20, 2016Tirana

Key Messages

¾ Pre-2009 drivers of growth not sustainable

¾ Need to rekindle and rebalance growth: from consumption-led to investment- and export-led

¾ Macro-structural reform agenda with equity and sustainability goals

¾ Reforms starting to deliver results – stay the course!

Strong pre-2008 growth in Western Balkans good for poverty reduction and income conversion with EU

SEE6 Economic Growth and Poverty, 2000-2013

3

Source: World Bank Staff estimatesNote: SEE6 includes Albania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro, and Serbia

Sources: World Bank staff calculations based on national statistical offices.

Real GDP per capita, % EU average income per capita

15

20

25

30

35

40

45

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

ALB BIH KSV MKDMNE SRB SEE

-5

0

5

10

15

20

25

30

35

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Povertyheadcount$5/day

Real GDPper capialgrowth

Real GDP and poverty headcount,2002-2014

Strong growth and poverty reduction over the past 2 decades in Albania, but wide gap with EU income average

Source: World Bank staff

24.5

18.5

12.514.3

4.25.8

7.5

1.30

5

10

15

20

25

2000 2002 2004 2006 2008 2010 2012 2014

Poverty count (percent)

Real GDP growth(percent)

25

36

0

5

10

15

20

25

30

35

40

EUAlb@6% Alb@4.5%

Years Needed for Convergence to EU Average Incomes at Different Pace of Growth

Source: World Bank staff

Investment contributes little to growth post-crisis, with upturn in 2015

Source: World Bank staff calculations based on data from national statistical offices.

Demand decomposition of real GDP growth, 2011-15s

-10

-5

0

5

10

15

2000-2007 2009-2014 2015f

Exports of goods and services Private GFCF Public GFCF Final Consumption Imports of goods and services

… external imbalances remain and productivity makes limited contribution to growth.

Factor decomposition of growth, percentage point

Source: INSTAT

Trade balance, percent of GDP

-30

-25

-20

-15

-10

-5

0

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

00-08 09-14

TFP

Pop., labor & human capital percapitaCapital Stock per unit of labor

Source: World Bank calucations

RORK

GFCF (2000=100)

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

2000 2002 2004 2006 2008 2010 2012

Rate of Return on Capital and Investment Index, 2000=100

FOSTER MACRO-FISCAL & FINANCIAL SECTOR STABILITY

Stay the course of fiscal consolidation to ensure debt sustainability

Sources: World Bank staff estimates

Scenarios of Public Debt, percent GDP

Fiscal Balance, percent of GDP and GDP Growth, percent

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2012 2013 2014 2015f

Real GDP growth (percent)

Fiscal balance (percent of GDP) 9 Transparent arrears clearance of 5% GDP

9 Process in place to prevent future accumulation of arrears

Example: Public Finance Policy-Based Guarantee

Sources: World Bank staff estimates

50.0

55.0

60.0

65.0

70.0

75.0

80.0

85.0

90.0

95.0

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

No reform Reform

Well-capitalized and liquid financial sector, but asset quality concerns amidst weak credit growth

0

5

10

15

20

25

ALB

BIH

KOS

MKD

MN

E

SRB

SEE6

Q3 2015 Q4 2007

Non-performing loans, percent total

Source: Ministries of Finance, Central Banks and World Bank calculations

-10-505

10152025303540

ALB - nominal ALB - real

Credit growth, percent

Source: Central Bank and World Bank staff calculations

ENHANCE EQUITY, QUALITY AND EFFICIENCY OF SOCIAL SERVICES AND INFRASTRUCTURE

Regulatory changes enhance social and fiscal stability of the pension system

Pension system projected fiscal balances before/after reform, percent of GDP

Since the enactment of the Pension Law ...

-3%

-3%

-2%

-2%

-1%

-1%

0%

1%

2015

2018

2021

2024

2027

2030

2033

2036

2039

2042

2045

2048

2051

2054

2057

2060

Reformed scheme

No reform

Source: World Bank staff calculations

9 14% increase in SII revenue in 2015

9 167,000 new workers added

9Government funding of pension system drops from >46 to <40%

9 1000 new beneficiaries collecting the social pension

Further cut losses and maintain collection rates to ensure energy sector sustainability

Energy sector losses, GWh and percent of total Energy sector sales, GWh and collection rate, percent

Continue improvements in access to piped water and of the water sector

?0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

1994

1997

2000

2003

2006

2009

2012

2015

Popu

latio

n (x

1000

)

Piped Urban Piped RuralNot piped Urban Not piped Rural

Source: WHO/UNICEF Joint Monitoring Program, 2015 Source: WB 2015

Access to piped water Water services sustainability assessment

IMPROVE QUALITY OF THE BUSINESS AND GOVERNANCE ENVIRONMENT

Exports gap, percent of potential exports, period average 2006-12

Source: World Bank Staff estimates

Real wage and TFP indexes

Source: World Bank Staff estimates

Private sector still to unleash its potential

0.0

0.5

1.0

1.5

2.0

2.5

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

TFP index

Real Wage index

-40

-33 -33

-27 -27 -27

-31

ALBMKD BIH MNESRB KOS SEE6

Ensure world-class institutional and business environment

0 5 10 15 20 25 30

Starting a Business

Dealing with Construction Permits

Getting Electricity

Registering Property

Getting Credit

Protecting Minority Investors

Paying Taxes

Trading Across Borders

Enforcing Contracts

Resolving Insolvency

Albania Average other WB Average ECA

Doing Business 2016 Ranking

Note: WB comprises Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro, Serbia; ECA comprises countries in Europe and Central Asia. Source: Doing Business, World Bank

Continue the fight for transparency and good governance

Corruption Perception Index,2008-2014

Source: Transparency International

9 Objective: more transparent, faster and improved citizens’ access to public services

9 Support streamlined service delivery of more than 300 services through re-engineering and digitalization

9 Separation of front- from back offices (done at PRO Tirana); digitalization of property registration (10 % done)

9 SMS campaign help monitor the quality of service delivery; reached 33,500 citizens and 20 percent response rate

Example: The Citizen Centric Service Delivery Project

0

20

40

60

80

100

120

140

2008 2009 2010 2011 2012 2013 2014

EU

Albania

PROMOTE STEWARDSHIP OF THE ENVIRONMENT

Address legacy and new pressures on environmental assets and climate risks

Pollution hotspots along the Adriatic coast line

9 Objective: remediation of contaminated industrial site

9 Safe disposal 45,000 m3

of hazardous waste

9 Improved quality of life of Porto Romano community

Example: The Integrated Coastal Zone Management and Cleanup Project

ELIMINATE DISINCENTIVES AND BARRIERS TO JOBS

Provide better job opportunities particularly for youth, women, minorities

30%

30%

Source: World Bank staff estimates

0

10

20

30

40

50

60

70

80

ALB

BIH

KOS

MKD

MN

E

SRB

SEE6

Labor force participation, % population aged 15+, 2015

21.9

45.8

62.9

61.0

53.1

47.0

35.8

32.5

EU28

SEE6

BIH

KOS

MKD

SRB

MNE

ALB

Youth unemployment, 2014, % labor force (15-24)

Source: National statistical offices

Priority areas for sustainable economic growth and poverty reduction in Albania

9 Foster macro-fiscal & financial sector stability

9 Enhance equity, quality and efficiency of social services &

infrastructure

9 Improve quality of the business and governance environment

9Promote stewardship of the environment

9Eliminate disincentives & barriers to (formal) jobs