TIRANA, October 24, 2022 – The ongoing war in Ukraine and consequent sharp increase in energy prices and slowdown in the global economy are likely to constrain Albania’s growth path. Following robust GDP growth in 2021, the country’s growth is likely to decelerate to 3.2 percent in 2022, says the latest Western Balkans Regular Economic Report (#22 in the series), released today.
Albania’s economy expanded by 6 percent in the first quarter of 2022, driven by private consumption, exports, and investment. The labor market improved and unemployment fell to 11.3 percent. After significant reduction in 2021, poverty is expected to continue declining, but rising inflation pressure will slow the recent gains.
In response to higher food prices, the government has increased budget allocations for support to vulnerable groups, which are already benefiting from regulated electricity prices.
However, geopolitical tensions could further increase inflation, disrupt supply chains, and disturb financial markets, all of which could further dim Albania’s growth prospects, says the report. Higher food prices and transport costs would adversely impact the poorest citizens.
While the government plans to continue fiscal consolidation, higher costs of public service provision can create additional pressures on growth, as higher spending may be needed to guarantee the energy supply through imports.
“Over the medium-term, the Albanian economy is expected to grow at a slower pace, similar to growth levels achieved before the pandemic,” said Emanuel Salinas, World Bank Country Manager for Albania. “These prospects hinge on the global recovery and Albania’s structural reforms, as well as keeping the course on fiscal consolidation.”
Similar to Albania, economic performance in the other Western Balkan economies continues to be impacted by global tensions, which are creating significant headwinds for the region.
“While growth in the first half of 2022 proved to be relatively robust, it is clear that the region is now facing a difficult environment,” said Sanja Madzarevic-Sujster, World Bank Senior Economist and a lead author of the report. “A combination of shocks are weighing heavily on the region’s outlook. Tighter global financing conditions, a slowdown in both domestic and external demand, as well as weakening business and consumer confidence will certainly impact the region’s financial sector.”
Facing ongoing shocks, the Western Balkans should prioritize policy support to the vulnerable, ensuring measures are targeted and timebound to minimize fiscal risks. Reforms that boost medium-term growth, at limited fiscal cost, should also be a priority.
According to the report, such reforms would include measures to increase the level of market competition, remove entry barriers to business, increase retention and reinvestment among foreign investors, reduce barriers to female labor force participation, improve quality of education, and raise standards of governance, including digitalization.
The ongoing crisis also underpins the importance of accelerating the green transition in the region away from volatile hydrocarbons toward cleaner electricity generation, as well as greener production and consumption patterns, says the report.
