Albania Faces New Economic Challenges Despite Strong Post-Pandemic Recovery

TIRANA  – A robust recovery took place in Albania in 2021, thanks to policy stimulus and resurgence of travel, construction, and extractive activity, says the latest Western Balkans Regular Economic Report (#21 in the series). Real GDP increased by 8.5 percent, fully recovering from the recession caused by the pandemic. Although growth in 2021 was broad-based, public debt remains high, however.

Credit to the private sector grew strongly during 2021 for both enterprises and households. Similarly, bank deposits continued to expand by 10.3 percent, with household savings forming around two-thirds of growth of total deposits in the banking system. Direct foreign investment increased in 2021, reaching 6.4 percent of GDP due to investments in extractives, banking, and telecommunications. The fiscal deficit declined to 4.5 percent of GDP in 2021, as a result of strong revenues.

Despite the strong post-pandemic recovery, however, Albania has been impacted by global developments and is facing new challenges that threaten economic and poverty prospects in 2022. Uncertainty with regard to the war in Ukraine is affecting price stability and growth, which is expected to slow to 3.2 percent in 2022. Private consumption is projected to return as the main driver of GDP growth. Private investment could provide further support to growth if business climate reforms are implemented.

GDP growth in the Western Balkans region reached 7.4 percent in 2021, after a contraction of 3.2 percent in 2020. This return to growth saw significant job creation, with employment demand helping to reduce poverty across all six Western Balkan economies.

However, the post-pandemic recovery has been cut short, as the war in Ukraine sends shockwaves across the region. Growth for the Western Balkans is now forecast at 3.1 percent in 2022.

“Despite a strong rebound from the pandemic, the Western Balkans now face a new set of challenges, compounded by the war in Ukraine, including rising energy and food prices, high inflation, and slowing trade and investment,” said Linda Van Gelder, World Bank Country Director for the Western Balkans. “Careful policy support will be needed to navigate the Western Balkans through these crises and protect the important gains made in 2021, including poverty reduction.”

The downside risks to the region’s economic outlook are daunting. An expanded conflict or prolonged war in Ukraine could trigger further disruptions to global trade and to energy and food prices. Refinancing risks could arise if external financial market conditions continue to tighten. Debt sustainability may become a concern if limited fiscal space is eroded by policy responses to higher energy and food prices amidst rising refinancing costs.

“In such an environment, government policy needs to focus on building resilience and on undertaking structural reforms to support growth and steer through the crises,” said Sanja Madzarevic-Sujster, World Bank Senior Economist and one of the report’s lead authors. “With limited fiscal space, countries will need to carefully weigh the costs and benefits of new spending commitments in response to higher energy and food prices, prioritizing the most vulnerable households.”

In the context of the energy crisis in Europe, the report also provides an assessment of the vulnerability of the Western Balkan countries to energy price shocks, measures adopted by the governments to mitigate the impacts, and how the crisis can affect the green energy transition going forward.

“In responding to the current energy crisis, and ensuring protection of the most vulnerable households and firms, the Western Balkans should also not lose sight of their long-term goals to achieve energy security and resilience as part of the green reform agenda,” adds Richard Record, World Bank Lead Economist and one of report’s the lead authors.

The report argues that sustained growth cannot happen without structural reforms to boost productivity, increase competition, invest in human capital, and strengthen governance. Measures to reduce business regulatory costs, increase market competition, support labor market participation, and strengthen the independence of public institutions would all be supportive of growth in an uncertain environment.