Albania’s Economy – Challenges and Opportunities for Recovery from the Pandemic

An Interview with Emanuel Salinas, World Bank Country Manager for Albania.

1. How do you evaluate the performance of the Albanian economy and the speed of its recovery?

ES: I think that the recent crises and difficulties have demonstrated the resilience and entrepreneurship of the Albanian people. If we consider common economic indicators such as GDP growth, we can see that the economy recovered strongly in 2021 (by as much as 7.2%). We see other indicators that also suggest a rapid recovery.

If we focus on the positive aspect, at the start of the pandemic, fast and decisive government action to support lives and livelihoods played a key role in helping the economy weather the initial lockdowns. Subsequently, the relatively quick normalization of economic activity enabled a strong recovery. Albania reopened for tourism. Significant construction activity - including reconstruction related to the 2019 earthquake - has provided crucial support for the economy.

But whenever we talk about good macroeconomic figures, I am very mindful that there are many individual realities and stories that are not captured in those percentages. I am painfully aware that many people could say 'how can you talk about economic growth or recovery when I lost my job, or my son had to stop going to school or my daughter had to close her business, or my father had to leave the country to find a job abroad.'

I say this with mixed feelings because macroeconomic indicators provide at best a very blunt overview of the situation. So, on one hand yes, it is good to see these positive macroeconomic trends, but on the other hand, we know that there has been a high impact on many livelihoods and that there are many people that have suffered through these difficult times. For every good public macroeconomic indicator there are many stories of hardship that we will never read about in the news. So, it is important to not draw too much comfort from macroeconomic indicators and remember that there is much to be done to ensure shared prosperity for the people of Albania.

2. What are your expectations for the performance of Albanian economy in 2022?

ES: Niels Bohr used to say that 'prediction is very difficult, especially if it is about the future.' From our side, the one thing we know for sure about 2022 is that we actually do not know how it will go. We do not know how the economy will perform, how the pandemic will develop, how the various mega trends will impact global and local economy, how the geopolitics will evolve or how much the impacts of climate change we will see materialize - and this is just the tip of the iceberg of the uncertainty facing us. But there are of course many things that we do not know that we ignore (the famous 'unknown unknowns').

Now, coming down to a bit less philosophical level, while nobody can predict the future (at least nobody that I know of or trust), we do know that there are specific risks that, if they materialize, will have significant impact on the economy. Some of these risks can be mitigated. For example, we can mitigate the risks of adverse global financial markets through strategic management of public debt). And some risks cannot be mitigated, so we need to be prepared to deal with them, for example, improving infrastructure to reduce the impact of floods and investing in irrigation to reduce the impact of droughts on agriculture. It is important to mention that when we think about the economy, we often assume that the government is the one in charge of it, often ignoring what we can do as individuals. For instance, if we worry about the impact of the pandemic on the economy, we all have the responsibility and the power to contribute to that by getting vaccinated and observing the basic safety measures.

3. What are the upside and downside risks for the Albanian economy in 2022?

ES: I would suggest that the most visible risk at the moment is the pandemic. At the risk of stating the obvious, we still don't know how the different variants will evolve and what will be the impact on global and local markets. As I mentioned before, there are other risks to the Albanian economy: climate change, technological change, global financial markets trends, and a long list of et cetera.

Now, I do not mean to be negative or present a bleak picture, especially during the holiday season. Albania has proven to be a very resilient economy and has weathered these crises in much better shape than other countries in the region. Also, when I walk in the streets of Tirana I am often marveled by how 'normal' the situation feels. This is not a small feat considering how disruptive the pandemic has been to not only the economy, but also day to day life in many countries in Europe and beyond.

So, when we think about risks, we should not approach this with a fatalistic perspective or be demotivated by the sheer magnitude and multiplicity of these risks. Rather, it is important to act on what we can to be prepared to deal with risks when they materialize. Governments can do that, for instance, by enhancing fiscal consolidation, which basically means ensuring that they spend less than what they collect in taxes, create savings for 'rainy days,' and verify that whatever money is spent is spent wisely and transparently. And this advice is also applicable to all of us as individuals, by the way.

4. The World Bank has warned the Albanian government about the risks of unclear contingencies created by PPP projects. Do you have any estimation of those contingencies and the risk the Albanian government might face in the near- and long-term future?

ES: We have not made our own calculations, but according to the Government's latest PPP monitoring report published in November 2021, the cumulative investment value of PPP contracts has increased to 35% of GDP in 2020.

Some years ago, PPPs were considered a panacea. And what's not to like about the idea of mobilizing private investment to undertake activities that had traditionally been considered the monopoly of governments? We all saw that PPPs were in principle good ways to bring in private sector practices to things like public services. All that is good, but I think that sometimes expectations on PPPs are higher than reality.

PPPs, when used well, can be an important tool for Governments to crowd in private sector financing and expertise to achieve government objectives. However, when used poorly, contracts can underperform and create fiscal risks for the Government. In a nutshell, what we have learned from PPPs all over the world is that (a) it is important to set performance indicators and structure incentives to ensure that these indicators are achieved and (b) PPPs do not eradicate risks - no financial instrument eliminates risks, they just pass them from one party to another.

I was working in the financial sector during the financial crisis of 2008. One lesson I learned quite painfully is that if I am party to a financial contract but I do not have full clarity of what the risks are and who is liable for them, most likely I will find out in the worst possible way that the person holding the risks is actually me.

At this point, we recommend for the Government to review carefully lessons learned from Albania's existing PPP portfolio. To ensure that the PPP instrument is used well, PPP selection and monitoring processes need to be further strengthened and they need to be conducted in a very transparent and competitive manner.

5. The World Bank has supported the reform of energy sector for several years. How do you evaluate the results of this reform until now?

ES: Indeed, we have been active in the energy sector for a long time and in different ways. We supported major investments to improve the infrastructure for electricity generation, major upgrades to improve the safety and efficiency of legacy dams, as well as the improvement of the reliability of power supply and the financial viability of the power sector in general. All of this was done in close collaboration with the Ministry of Infrastructure and Energy.

In 2015 we supported the preparation of the Financial Recovery plan for the sector and out of that we have seen significant improvements in the sector's financial sustainability, for example, through reduction of electricity losses and increased collection of bills. An improved financial sustainability has also enabled an increase in investments.

All that is very good, but additional reforms will be needed to ensure the sector's long-term sustainability. For example, a functional Albanian Power Exchange (ALPEX) is needed to accommodate the competitive and transparent power market structure in Albania, minimize the cost of imports, enforce financial discipline, and provide market access to independent power producers and consumers.

6. What should the Albanian government do to mitigate its dependence on hydropower?

ES: Albania's electricity is generated mainly from hydroelectric power. And climate change is resulting in more frequent and severe weather events such as droughts and floods that pose additional challenges to electrical infrastructure. Albania is one of the countries with the highest exposure to climate change in Europe, so we expect that these risks will only get higher over time.

There are three things that other countries have done to mitigate these risks:

1. increase the reliability of their domestic energy production base, by complementing hydropower through a diversified green energy base and by strengthening hydro reservoir management;
2. liberalize electricity tariffs or a temporary tariff surcharge during dry periods can help transfer risk away from the energy sector; and
3. develop financial instruments to smooth out financing needs, particularly when facing a combination of volatile domestic hydro generation and volatile international import tariffs.

But altogether, in Albania what we need is a carefully thought-out hydropower risk mitigation strategy that carefully assesses risks and puts in place the most suitable solutions for the context of the country. This strategy would be a great way to prioritize actions, policies, and investments.

Now, I am going to be a bit more technical, as we really cannot discuss these issues without robust analysis: we recently developed a hydro-financial risk mitigation model for Albania's energy sector based on supply-demand projections over the next 10 years. With this analysis we hope to help policymakers by quantifying the magnitude of hydro-financial risk and creating a preliminary design of the mitigation measures that are recommended for protecting the power sector and the regulated costumers. We tested several risk instruments, including tariff adjustment, stabilization fund, contingent loans, and weather insurance. And, in summary, we think that a combination of all these financial instruments may be needed. In our analysis we also identify the institutional arrangements that are required to implement the risk mitigation strategy.

7. The Albanian government has submitted an evaluation for $725 million needed for a national water supply project. What is the evaluation of the World Bank for this project and its plans to support it?

ES: We are very much aware that the provision of public services at the local level is an area where a lot needs to be done. This includes not only water supply, but also sanitation, waste management, and even childcare and early childhood education.

Now, if we focus on water supply, we see that most of the water utilities continue to perform poorly both technically and financially. This results in low levels of service and inability to extend the services to those that don't have them, usually the most vulnerable. Furthermore, most utilities are chronically dependent on central government funding. We have seen that this issue has received a lot of attention lately from the Government and we really commend the authorities for identifying the need to take action. The one thing we know for sure is that radical changes are needed to improve the quality and sustainability of these vital services. Cosmetic changes leaving the status quo in place will simply not be sufficient.

We will support the sector through an innovative financing instrument that officially is called 'Program for Results,' but unofficially we call it 'instead of fixing the pipes, let's fix the institutions that are supposed to fix the pipes.' Yes, I am aware that the unofficial title sounds less elegant than the official one, but I think it is better at conveying the idea. This Program is designed jointly with the Ministry of Infrastructure and Energy and AKUM as well as the Ministry of Finance, and rather than just providing financing for infrastructure, will focus on supporting institutional reform.

8. How do you evaluate the performance of the World Bank's projects in Albania?

ES: In three words "Good, not enough".

Recently we concluded a formal assessment of the performance of our projects over the past four years. This is an exercise we do in every country where we operate, which we call 'Completion and Learning Review.' Our emphasis is on LEARNING, because we are very much aware that we don't have all the answers and the issues we deal with are not only complex, but also rapidly evolving. Every time we start a project we do so with lots of hope, good intentions, and our best expertise. But that combination is never a guarantee of success. Sometimes, thankfully more often than not, we do achieve what we hoped for, but sometimes in spite of our best intentions and efforts, we fail. And ironically, our failures are somehow blessings. We learn a lot more from our failures than from our successes. They keep us humble and challenge us to be better next time. So, we are proud of what has been achieved, but we yearn for more. We owe it to the people of Albania.

9. What should the Albanian government do in the medium- and long-term to mitigate the risks of the pandemic and to turn this crisis into opportunity?

ES: In my opinion the government's responsibility is to make vaccines available, put in place rules to limit infections, and provide healthcare services to those infected by COVID. Beyond that, it is OUR responsibility to get vaccinated and take basic precautions to avoid spreading the virus through our actions.

Unfortunately, I see still a lot of hesitancy and misinformation with regards to vaccines as well as a lot of unnecessary risks being taken by many people, often plainly ignoring the guidance and rules put in place to protect us and avoid contagion.

So, speaking as a fellow human, I would like to implore everyone to stop expecting the government to solve everything for us and take responsibility for our own actions. Spend less time on Facebook, Instagram, Tik Tok or whatever social network currently keeps us hooked and fills our brain with trash. Grab a book or go for a walk by the lake. Take some fresh air. Exchange ideas or greetings instead of memes and gossip. Realize that it is us, each one of us, that is responsible for doing what we can to get out of this pandemic and stop expecting that somebody will resolve it for us.

10. What are the sectors the Albanian economy needs to focus on in the future and what should the Albanian government do to support the sustainable development of the country?

ES: As mentioned before, we try to avoid forecasting the future, and picking sectors is a variation of that.

Instead of that, we have been emphatic in saying that Albania should focus on taking care of its human capital. While we do not know what sectors will be winners and losers in the future, we do know that right now the country is losing enormous opportunities through deficiencies in human capital. What do we mean by that? We estimate that a child born in Albania will only attain around 63% of his or her lifetime potential productivity. So, that child will lose around 37% of his or her potential productivity compared to if he or she could live healthy lives and benefit from high quality and relevant education that would equip that child with the skills that will be needed in the work environment.

Similarly, we know that a lot of talent is underutilized given many women must stay at home due to lack of childcare. This is a loss that a country like Albania simply cannot afford. Moreover, the lack of childcare and early childhood education also undermines the learning potential for children as these deficiencies happen in some of the most formative years for children. So, I would say, before trying to predict the future, let's deal with the challenges that we have in the present. Shall we?

This interview was originally published in Albanian by Monitor.

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