TIRANA – A robust recovery has taken place in Albania in 2021, thanks to political revival and a resurgence in travel, construction and extractive activity, according to the latest regular economic report on the Western Balkans (No 21 of series). Real GDP grew by 8.5%, fully recovering from the recession caused by the pandemic. Although growth in 2021 has been broad-based, public debt remains high.

Credit to the private sector has increased sharply in 2021, for both companies and households. Similarly, bank deposits continued to grow by 10.3%, with household savings accounting for about two-thirds of the growth in total deposits in the banking system. Foreign direct investment increased in 2021, reaching 6.4% of GDP due to investments in extractive industries, banking and telecommunications. The budget deficit fell to 4.5% of GDP in 2021, thanks to strong revenues.

Despite the strong post-pandemic recovery, however, Albania has been affected by global developments and faces new challenges that threaten economic and poverty prospects in 2022. Uncertainty regarding the war in Ukraine is affecting the stability of prices and growth, which is expected to slow to 3.2% in 2022. Private consumption is expected to once again become the main driver of GDP growth. Private investment could provide additional support for growth if business climate reforms are implemented.

GDP growth in the Western Balkan region reached 7.4% in 2021, following a contraction of 3.2% in 2020. This return to growth has led to significant job creation, with job demand contributing reduce poverty in the six Western Balkan economies.

However, post-pandemic recovery has been halted as the war in Ukraine sends shockwaves throughout the region. Growth for the Western Balkans is now forecast at 3.1% in 2022.

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

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

“In such an environment, government policy must focus on building resilience and implementing structural reforms to sustain growth and weather crises,” said Sanja Madzarevic-Sujster, Senior Economist at the World Bank. and one of the main authors of the report. “With limited fiscal space, countries will need to carefully weigh the costs and benefits of new spending commitments in response to rising 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 Western Balkan countries’ vulnerability to energy price shocks, the measures adopted by governments to mitigate the impacts and how the crisis may affect the ongoing green energy transition before.

“In responding to the current energy crisis and ensuring the protection of the most vulnerable households and businesses, the Western Balkans must also not lose sight of their long-term goals to achieve energy security and resilience in the framework of the green reform agenda,” adds Richard Record, senior economist at the World Bank and one of the report’s lead authors.

The report argues that sustained growth cannot occur 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 support growth in an uncertain environment.