Albania strategy overview

Full strategy  (0.5Mb) Approved 4  Apr 2006

Strategjia për Shqipërine  (0.6Mb)

Summary of public comments  (0.1Mb)

Albania continues to fulfil the conditions specified in Article 1 of the Agreement Establishing the Bank. The conduct of recent parliamentary elections, held on 3 July 2005, improved considerably compared to the previous elections although some irregularities still occurred and the elections had to be repeated in several electoral districts. The opposition Democratic Party won a relative majority of seats, but not enough to form its own government. After a lengthy process for the tabulation of the election results, a coalition government was formed in early September, with Dr. Berisha as Prime Minister. His Democratic Party holds 10 of the 14 Ministries, with the remaining four going to each of the four smaller coalition partners. The handover of power from the socialist government to the new coalition government in early September 2005 was peaceful and relatively smooth.

Albania maintains good relations with its neighbours and plays a constructive role in the region. The government has shown restraint in relation to sizeable Albanian minorities in Serbia and Montenegro and FYR Macedonia. Talks with the EU on a Stabilisation and Association Agreement (“SAA”) were initiated in 2003. The negotiations for the SAA have been concluded, and the agreed text was initialed on 18 February 2006. The text has now been proposed for signature to the European Council. Albania will continue to be required to show material progress of commitments, in areas such as the reform of the judiciary system and the fight against corruption. Albania is also pursuing accession to the NATO.

Macroeconomic environment

The macroeconomic environment has remained favourable in recent years although high trade and fiscal deficits remain significant risk factors. Economic growth is stable at around 5-6 per cent, driven mainly by construction, business services and transport. Official unemployment remains around 15 per cent of the labour force but underemployment is widespread. Annual consumer price inflation is subdued at 2-4 per cent. The exchange rate is relatively stable, subject to appreciation pressures and seasonal effect of uneven transfer of remittances peaking in summer and winter months.

Albania has made significant progress in transition reforms in recent years but significant challenges remain. Business environment suffers from a high level of corruption, serious shortcomings in the judiciary, and very weak institutional and law enforcement capacity. Despite sizeable investments in recent years, infrastructure is far from being adequate for private sector development, including substandard road network, lack of reliable power supply, and limited regard paid to environmental consequences of rapidly expanding economic activity. Poverty is also a significant issue, particularly outside the main Tirana – Durres area.

Main challenges

The main challenges for the new government are:

• substantial strengthening of the public sector, including an effective and systematic fight against corruption and organised crime; increased efficiency and impartiality of the judiciary and public administration, particularly the customs and the tax system; and resolution of land ownership;

• infrastructure improvements, including upgrades of the road system, modernisation and expansion of seaports and regional airports, progress in restructuring and privatisation of utilities to ensure reliable services, particularly in power and telecom sectors, and greater attention paid to environmental issues, including waste disposal and wastewater treatment as well as environmental issues related to expansion of the private sector; and

• improving access to finance, particularly for SMEs and enterprises outside the main Tirana – Durres area, as well as improving the business environment for foreign direct investments (“FDIs”) that would contribute to the development of the industrial sector.

The Bank has played an increasing and important role in the transition process in Albania: 21 operations for a direct Bank financing of EUR 291 million and a further EUR 709 million from sponsors and co-financiers. The Bank, in close conjunction with other IFIs and donors, could substantially increase its role over the strategy period through focusing selectively on the identified challenges.

Operational priorities

The Bank’s operations over the strategy period will focus on five main general priorities: (i) development of infrastructure, power and energy, municipal and environmental projects; (ii) privatisation and restructuring of remaining state owned utilities (e.g. telecom, power), and commercialisation of municipally-owned utilities (e.g. water); (iii) development and consolidation of financial sector; (iv) FDI and local enterprises with a particular attention to SMEs; and (v) policy dialogue especially in the areas of regulating and strengthening the markets for infrastructure including capacity and institution building. Specifically, the Bank will focus on the following sectoral priorities:

Infrastructure, Power and Energy, Municipal and Environment Sectors

Supporting the rehabilitation and restructuring of the transport and energy sectors, particularly within a regional context, will remain the main focus of the Bank. Where possible, the Bank will endeavour to channel long term finance to private public partnership schemes, subject to open and transparent tender procedures. The Bank will pay a particular attention to the implementation of projects in the energy and transport sectors. The Bank will continue its policy dialogue on the privatisation of utilities and will make itself available to support viable privatisation schemes. The Bank will also explore the viability of financing structures specifically aimed at environmental and energy efficiency projects.

Enterprise Sector

Two priorities will be pursued in parallel: First, the Bank will continue to play a major role in promoting private sector development through financing existing as well as green field investments with a particular attention to inward investments to Albania. The Bank will continue to complement the local banks for larger deals and will concentrate its efforts to fill the gap in terms of available financing instruments in the market for local enterprises through specially designed products. Second, the Bank will support the privatisation and/or commercialisation of remaining large state owned companies.

Financial Sector

A prime objective of the Bank will be to renew its efforts to support and promote SME lending through local banks. The Bank will explore the possibility of providing new financial products tailored to increase lending to SMEs and improve the skills of local banks. The Bank will continue to support the restructuring and consolidation of the banking sector through new equity investments in local banks and participation to possible mergers. In the non-bank financial sector the Bank will work to complete the privatisation of INSIG.

The Bank will continue to ensure that all EBRD operations in Albania are subject to the Bank’s Environmental Policy and Procedures and incorporate, where appropriate, Environmental Action Plans.

Given the substantial transition challenges in Albania, the Bank will need more than ever the support of donors in terms of technical assistance, grant co-financing of critical infrastructures and subordinated investment resources. The Bank will work alongside with the EU, EIB and important donors, with a special reference to Italy, in the context of an increased policy dialogue and joint financing.