1308214530-BSTDB Albania Country Strategy by ashrafp

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									BD2011-049a


              BLACK SEA TRADE AND DEVELOPMENT BANK




                     ALBANIA
                    Country Strategy

                        2011-2014



                        THESSALONIKI
                          APRIL, 2011
                         BoD Approved
BD2011-049a




                                       TABLE OF CONTENTS


      I.      Recent Economic Developments and Outlook
              a.     Real Sector
              b.     Public Sector and Fiscal Policy
              c.     Monetary and Financial Sector
              d.     External Sector
              e.     Forecast for 2011–2014

      II.     Overview of BSTDB Portfolio

      III.    Review of Country Strategy

      IV.     Priorities



      TABLES:
      Table 1:       Basic Macroeconomic Indicators at a Glance
      Table 2:       Remittances and FDI inflows
      Table 3:       Current BSTDB Portfolio - BoD Approved Operations
      Table 4:       BSTDB Country Strategy Performance (2007-2010)




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Table 1:     Basic Macroeconomic Indicators at a Glance
Country Long Term Foreign Currency Sovereign Risk Rating: S&P: B+ | Moody’s: B1 | Fitch: NR
               INDICATOR                         2007        2008     2009         2010       2011                  2012
                                                                                (estimate) (forecast)            (forecast)
         Population (beginning-year; million)           3.17        3.19        3.20        3.17        3.18        3.19
         Average exchange rate (Lek / USD)             90.43       83.89       94.98      105.69      113.45       116.52
              Inflation rate (CPI Avg.; %)              2.9%        3.4%        2.3%        3.6%        3.6%        3.7%
     Average monthly earnings (Nominal, USD)          373.23      435.51      430.35         n.a.        n.a.        n.a.
         GDP at current prices (Lek million)          967.67     1,088.13    1,143.61    1,180.00    1,280.00    1,385.00
           GDP at current prices (USD bn)              10.70       12.97       12.04       11.16       11.28       11.89
          GDP / capita (in crt. prices; USD)         3,375.71    4,060.94    3,768.63    3,522.01    3,548.10    3,726.08
                 Real GDP growth (%)                    5.9%        7.7%        3.3%        3.1%        3.7%        4.5%
    Unemployment rate (ILO definition; eop; %)         13.5%       13.0%       13.8%       13.8%       13.4%       12.8%
             Industrial output growth (%)               4.0%        9.4%       -1.2%        3.0%        4.5%        5.0%
            Agricultural output growth (%)              0.5%        7.7%        2.7%        2.0%        3.5%        4.0%
    Remittances - Current transfers, net (USD m)     1,431.61    1,379.47    1,306.89    1,366.00    1,466.00    1,626.00
  Direct foreign investment in the country (USD m)    662.27      972.68      977.98      750.00      900.00     1,000.00
      Consolidated budget balance / GDP (%)            -3.5%       -5.5%       -7.0%       -3.4%       -3.8%       -3.0%
            Gross external debt (USD m)                  n.a.        n.a.        n.a.        n.a.        n.a.        n.a.
           Gross external debt / GDP (%)               23.8%       29.9%       34.1%       36.6%       37.2%       37.2%
           Public external debt / GDP (%)              15.7%       18.4%       23.7%       26.2%       26.9%       26.8%
           Private external debt / GDP (%)              8.1%       11.5%       10.4%       10.4%       10.3%       10.4%
           Goods: Exports (f.o.b.; USD m)            1,078.72    1,355.64    1,048.04    1,399.00    1,568.00    1,853.00
           Goods: Imports (f.o.b.; USD m)            -3,978.33   -4,907.51   -4,264.15   -4,353.00   -4,496.00   -4,747.00
    Trade balance (exp. fob. - imp.fob.; USD m)      -2,899.61   -3,551.87   -3,216.11   -2,954.00   -2,928.00   -2,894.00
               Trade balance / GDP (%)                -27.1%      -27.4%      -26.7%      -26.5%      -26.0%      -24.3%
          Current account balance (USD m)            -1,150.83   -2,001.98   -1,874.93   -1,285.00   -1,091.00    -861.00
             Current account / GDP (%)                -10.8%      -15.4%      -15.6%      -11.5%       -9.7%       -7.2%
    Forex reserves (excluding gold; eop; USD m)      2,104.22    2,319.78    2,313.91    2,432.00    2,341.00    2,354.00
 Last updated on February 16, 2011


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Sources:

 Data for items 2-3, 12-13, 17-18, 21 from Bank of Albania

 Data for items 4-5, 8, 9 & 14 from Institute of Statistics

 Data for items 10-11 from EIU Country Reports

 Data & Projections for items 15-16 from IMF Country Reports

 Data for item 23 from International Financial Statistics, IMF, January 2011




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   I. Recent Economic Developments and Outlook
   a.              Real Sector
   Between 1998 and 2010 economic growth in Albania averaged over 6.5% per annum. Over this period the
   relative importance of agriculture declined from over 27% of GDP to 16.6% (still a very high value in
   comparison to other peers). The share of manufacturing has risen from 6% to 9% of GDP but remains very
   low by regional comparisons. At the same time, construction has become a more important sector of the
   economy, whose share of GDP has risen from 8.3% to 13.9% between 2000 and 2008. Services have
   remained stable as a share of GDP at just under 60%. For this period therefore, most of the recent growth
   is attributable to a marked shift of workers from agriculture to services and manufacturing. The strong
   growth was supported by strong remittances from the Albanians living abroad, increasing levels of FDI,
   increased availability of credit, and high private savings, which all contributed to high levels of investment.
   Total gross investment has increased from 31.7 percent of GDP in 2000 to 40.2 percent in 2009, and private
   investment from 24.5 to 35.5 percent over the same period. However not all such investment went into
   productive activities, with only about 10 percent of GDP going to investment for production purposes up
   to 2006, as the bulk of investment has been skewed towards the construction sector.
   During 2009, although the Albanian industrial output faced a contraction of the growth rate as a
   consequence of the negative shocks coming form the global economic crisis, the overall economy still
   performed positively and demonstrated again that it is a vibrant economy. This growth has generally been
   supported by a satisfactory performance of the services sector and a return to its normal pace of agriculture.
   According to the Institute of Statistics (Instat), real GDP increased by 3.3% in 2009 and 4.9% in the third
   quarter of 2010 compared to the third quarter of 2009. It is worth highlighting that this positive growth rate
   of the economy for 2009 and 2010 was accompanied by the preservation of the macroeconomic stability
   within acceptable parameters, and is highly satisfactory if put at a comparative perspective with the countries
   of the region.
   The positive developments during the hard global economic times of 2009 and 2010 are mainly attributed to
   the intertwining of the fiscal and monetary macro-economic policies pursued adequately, carefully and in a
   coordinated way by the government and monetary authority. Another factor with an important attribute of
   the sustainability of the economy of Albania were the radical structural, fiscal, administrative and legal
   reforms undertaken by the Government in the course of the recent years, as well as of the budget policies
   with well-defined priorities. The pay-off of these reforms and policies coincided with this difficult economic
   time, smoothing to a considerable extent the negative effects of the global crisis.


   b. Public Sector and Fiscal Policy

   Public Policy
   Public policy underpinned economic development in the recent past years. One of the greatest successes of
   public policy in Albania is the great reduction in poverty levels which accompanied economic growth. The
   absolute poverty headcount rate fell from 25.4 percent in 2002 to 12.4 percent in 2008. Even more
   pronounced was the decline in rural poverty, which fell by 47% from 2002 to 2008; in 2008 the poverty rate
   in rural areas was about 14 percent.
   During the last few years, the business environment improved considerably. For example, between 2007 and
   2009 Albania‟s ranking, out of 178 countries, in the ease of Doing Business improved from 136th to 82nd.
   Examples of government programs which successfully improved the institutional framework for doing
   business include the introduction of a flat tax of 10 percent on businesses and individuals, and the creation
   of a one-stop shop for business registration. Also, between 2004 and 2009 Albania‟s governance indicators
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   improved in all six areas measured by the Worldwide Governance Indicators (WGI) of government
   effectiveness and rule of law. However, notwithstanding such significant progress, there is room and need
   for further improvement in various areas of implementation of critical laws and regulations in line with the
   requirements for EU accession, which also count for attracting foreign investment. To this end, establishing
   a fully functional system of Regulatory Impact Analysis (RIA) and of a permanent Regulatory Reform Task
   Force would lend added credibility to the process.
   The relative improvement in Albania‟s economic outlook, as outlined above, owes much to sound fiscal and
   monetary policy frameworks that remain largely in place. Fiscal consolidation has supported the monetary
   policy framework which strives to keep inflation under control. In past years Albania‟s fiscal stance has been
   restrictive, while the monetary policy stance has remained broadly neutral.

   Fiscal policy
   Although past strict application of prudent fiscal policy supported a downward trend in deficits, and in
   combination with strong GDP growth public debt declined from 58.8 to 53.4 percent of GDP between
   2003 and 2007, this trend reversed starting with 2008 due to the increase of public investment and in the
   current context of high concerns about growing risks of sovereign debt financing deficits becomes
   increasingly difficult.
   In 2008 and 2009, in order to alleviate the contractionary impact of the global crisis, the fiscal policy was
   relatively more pro-active. The high level of public investment was the main instrument of the fiscal policy
   used for mitigating the negative effects of the global crisis, economic activity having been supported by a
   considerable volume of public investments with 9.9 per cent of the GDP, out of which 8.8 per cent have
   been carried out by the central government. These policies and the acceleration of public investment served
   to soften the impact of the economic crisis, but resulted in increasing fiscal deficits of 5.6% in 2008 and 7%
   in 2009. Due to the fact that the economic consequences of the global financial crisis were not immediate
   for Albania, an ambitious growth and development plan went ahead as initially planned. The continuous
   improvement of the road infrastructure, the modernization of technology and the progress achieved in
   human development have enhanced the efficiency of economy.
   These developments have provided a positive impact on employment. The consequent increase in
   household income maintained a high level of consumption but the strong domestic aggregate demand had
   its impact on the sustainability of the current account of the balance of payments.
   Along with reduced availability of foreign funding and increased cost of such funds, the uncertainty induced
   by unanticipated changes of spending plans due to lower than expected revenues in 2010, had mixed to
   increase risk aversion of foreign investors. Notwithstanding the fact that Albania had a highly successful
   first bond issue, future funding at appropriate terms and conditions depend upon the credibility of the debt
   reduction plan of the government. Such credibility of a macroeconomic framework aimed at achieving long
   term fiscal sustainability may be supported and enhanced by the introduction of a fiscal rule.
   The Albanian parliament passed the 2011 budget, which envisages a budget deficit of 3.5% of GDP. Budget
   expenditures are set to increase by 10% y/y in nominal terms, while revenues are projected to grow by
   8.6%.The higher deficit reflects government spending for key infrastructure projects, as well as for
   education and healthcare.


   c. Monetary and Financial Sector



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   Monetary Policy & Inflation
   Inflation accelerated to 4.1% in the first quarter of 2010, exceeding the ceiling of the 2-4% target band set
   by the Bank of Albania, as utility tariffs rose sharply. After the first trimester of 2010 inflation fell and
   remained within the 2-4% band.
   The Monetary Policy in the last two years has been expansionary. The Surveillance Council has decided to
   decrease three times the base interest rate from 6.25% in January 2009 to the level 5% (the same rate of the
   March 2005).
   An ongoing credit boom, however, has led to demand pressures that have fed the high non-tradables
   inflation, as well as the widening current account deficit. Currently, some three-quarters of all banking sector
   loans are foreign-currency denominated and destined to companies operating in the non-tradable sectors
   and mostly to financing imports. As the proceeds from such financings are converted to local currency, they
   contribute to overvalue the latter and eventually undermine the country‟s export competitiveness. Other
   factors may also be indicative of exchange rate fluctuation, like: capital inflows in forms of foreign direct
   investment and remittances, and application of a prudent monetary policy which has focused attention on
   the trend of the differences between local currency interest rate and the interest rate of other currencies.

   Banking Sector
   The financial sector has developed strongly in recent years and adequate regulation and timely monetary
   interventions helped to limit the impact of the global financial crisis. Savings have been adequate to finance
   relatively high levels of investment, and financial intermediation has increased enormously, although for
   many SMEs the access to credit remains limited. The strength of the financial system is a reflection of the
   strong and efficient supervision regime implemented during the last decade.
   The last months of 2008 and the first months of 2009 were characterized by a decline in the financial
   system‟s activity, this being a difficult period for the entire world economy. However, the impact over the
   financial institutions that operate in Albania remained at low levels, as a consequence of non-exposure to
   the toxic assets which were considered to be the main cause of the world wide crisis. Actually, it seems that
   the situation has started to come back to normal and the financial situation of the financial system as a
   whole and banking sector in particular, is more sustainable.
   Since March 2009 when the government divested its remaining stake in United Bank of Albania the banking
   sector has been fully privatized and according to EBRD data at the end of 2008 foreign owned banks' share
   of assets amounted to over 93%. Italian, Austrian, Greek, German and French banking groups such as,
   IntesaSanPaolo, Raiffeisen, National Bank of Greece, Commerzbank and Societe Generale, amongst others,
   are all present in Albania. The banking sector's capital adequacy ratio is a high 15-16% heading into 2011
   and even though non-performing loans have increased from a pre-crisis 4% to approximately 14.4 % in
   November 2010 the banking sector is stable.
   The last quarter of 2008 and the first quarter of 2009, experienced a shaking in the confidence of the public
   in the banking sector, being reflected in withdrawing their savings, invested with these financial institutions.
   In the course of the two trimesters in question, the total amount of deposits was reduced by 8.6 percent.
   However, starting with the second trimester of 2009 the situation reversed, and in October 2009 the total of
   deposits grew by positive rates (1.6 percent) in annual terms; this trend has followed in the subsequent
   periods.
   As a consequence of increased uncertainty about costumer behavior and economic prospects while also
   facing the growth of non performing loans at high rates, the banks opted for a more conservative stance in
   lending. During 2009, Bank of Albania drafted the policies to stimulate lending in ALL, focusing on two
   main directions: first, through reduction of the base interest rate in January and October by respectively 0.5
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   percentage points, thus taking the rate of repos down to 5.25 percent from 6.25 which it was at the
   beginning of the year 2009. These steps are expected to have an impact on the growth of lending to the
   economy, specifically in the domestic currency. On the other hand, Bank of Albania requires, by means of
   regulatory changes, the other banks to weight the credit portfolio exposed to the exchange rate risk
   (consisting a considerable share of the credit risk) by 50 percent more, thus imposing on the banks more
   rigorous requirements for capital to the effect of preserving the required levels of capital adequacy ratio.
   Concerning the credit portfolio quality, it may be stated that an evident worsening in the course of 2009 is
   observed, where the “nonperforming loans / total loans” ratio amounted to over 10%, almost double the
   ratio of the previous year. In October 2009, the nonperforming loans of private sector consist 74 percent of
   the total nonperforming loans. A main cause is the share of foreign currency loans in the total loan
   portfolio, of around 75 percent. The growth of nonperforming loans, on its side, has tightened the
   procedures of credit-granting, thus causing reduction of credit volume and shortening of the credit maturity
   periods.
   The profitability of banks also declined during 2009 and 2010, low performance connected to the growth of
   provisions of banks for covering the eventual loan losses, and with the steep decline of revenues coming out
   of the treasury and inter-banking transactions (to about half the amount gained in 2008).
   The capitalisation of the banking sector is at satisfactory levels and always above the minimum required level
   of 12 percent. However, starting from the last quarter of 2008, the capital adequacy ratio has experienced a
   decline. The main cause of capital adequacy decline is the annual increase of risk weighted. The risk
   weighted assets increase has come about mainly due to the regulatory changes, according to which the
   weighting coefficients for the credit exposed to the exchange rate risk have increased.
   The loan/deposit ratio is well below 100% suggesting the banking sector has ample scope to grow in the
   medium term, without having to overly rely on external financing. The banking activity is carried out divided
   almost equally between the foreign and local currency, on the side of assets and liabilities of the balance
   sheet. This is due to the fact that 50 percent of the assets and almost 49 percent of the liabilities of the
   banking system are denominated in foreign currencies. Although almost 70% of lending is FX-linked,
   however foreign exchange deposits essentially cover this exposure. The foreign currency loans to foreign
   currency deposits ratio was at the level of 99 percent as of October 2009. The relatively low credit
   penetration and loan/deposit ratios compared to countries in the region mean the scope for growth in the
   Albanian banking sector in the medium term is significant.


   d. External Sector
   Foreign trade
   Albania is one of the few economies in the region that weathered the global crisis reasonably well, partly
   because its economy is less integrated than others. Due to its relatively limited exposure to global influences,
   the Albanian economy was impacted with a delay by the financial crisis. The crisis had the biggest impact on
   exports, while domestic demand for imports remains relatively stable. As a result, the current account deficit
   remains high and government debt continues to rise. For 2008 and 2009 the current account deficit raised to
   clearly unsustainable levels in excess of 15% of GDP, which fact also lead to a significant increase of foreign
   debt.
   The net inflows of foreign direct investments expressed in Euro increased markedly in 2008 relative to the
   pre-crisis period, and in 2009 was further increased compared to the previous year. This increase in FDI
   somehow compensated the steep decline in remittances with the effect of soothing foreign financing
   worries.

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   For 2010, the situation improved significantly. Albania‟s current account deficit fell by 34.2% y/y to EUR
   672mn in Jan-Sep 2010, due to narrowing foreign trade gap, central bank data showed. The current account
   deficit accounted for 7.6% of the annual GDP projection, down from 12.2% in the same period last year.
   Foreign trade gap shrank by 12% y/y to EUR 1.5bn, as exports grew by 58.7% and imports by 5.1%. The
   rise in exports was supported by strong electricity sales, since heavy rainfalls enabled the country‟s main
   hydropower generation plants to work at maximum operation. In addition, the exports of construction
   materials, textiles and footwear products also contributed to the overall growth. The services account
   balance also improved, posting a EUR 148mn surplus in the period, up by 72.1% y/y. Within this category,
   the tourism revenue grew by 43.5%, mainly due to a 12.8% fall in tourism outflow. Current transfers rose by
   2.9% y/y to EUR 684mn, with emigrant remittances accounting for EUR 524mn, down 5.6%. However in
   quarterly terms, remittances inflow reversed to an annual increase of 5.3% in Q3, after falling by 6.6% and
   8.7% in previous two quarters.
   Workers‟ remittances have contributed significantly to Albania‟s economic development. Remittances are
   significant at around 13-14% of GDP, and have been directed to the lowest income households, thus
   helping to alleviate the poverty gap and improve income distribution. Over the medium term, a key question
   is whether remittances will continue to support the current account. The crisis prompted remittances to fall
   towards 10% of GDP, and the experience of other countries has shown that over the medium term the
   contribution of remittances as a proportion of GDP might be expected to decline. However, the percentage
   fall in remittances, which cover a considerable part of the trade deficit, turned out to be smoother than what
   was expected at the beginning of 2009.
   The improved outlook for the economic and financial situation in the developed countries in the coming
   years should have a positive impact on the remittances and the income items, which should result in current
   account improvements. Various analyses in the central bank assess that the current account deficit will
   remain at sustainable levels in the medium term, therefore there is no urge for contingency policies at the
   moment.


   External debt
   Foreign debt levels are low. Law no.9665, dated 18.12.2006 on state borrowing, state debt and loan state
   guarantees in Republic of Albania regulates the emission and management of the state borrowing, state debt
   and loan state guarantees.
   Data from the Bank of Albania show gross foreign debt at the end of 2008 represented 29.6% of GDP
   (approximately EUR2.6bn). Gross foreign exchange reserves at the end of 2009 covered more than 4
   months of imports. In 2010 foreign exchange reserves increased moderately, and remain comfortable.
   Foreign exchange reserves covered almost 8 times external debt service obligations last year, lower that
   almost 9 times in 2009 because of last year‟s EUR 200mn syndicated loan.
   Public debt, of which over two thirds is domestic debt, increased rapidly in the last 2-3 years. The
   government also aims to reduce the level of public debt to 59% of GDP in 2011. The official medium term
   policy is to lower public debt to 50% of GDP by 2015. The majority of the foreign debt is denominated in
   EUR and has an average maturity of approximately 11.4 years. Gross foreign debt may reach 36% of GDP
   by the end of 2010.
   The Albanian government sold its first Eurobond issue on October 28, raising some EUR 300mn. The
   bonds had a five-year maturity and a fixed annual coupon of 7.5%. A second Eurobond issue is planned for
   2011.


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       Table 2: Remittances and FDI inflows (percent of GDP)

                        2002          2003    2004     2005       2006        2007       2008       2009
   Remittances           13.0          14.4    13.7     13.7       14.1        13.5       10.9       10.8
   FDI, net               3.0           3.2     4.6      3.3        3.6         6.0        6.7        8.2
   Source: National Bank of Albania



   e. Forecast for 2011-2014
   The preservation of the macroeconomic stability, keeping the inflation rate around 3 per cent, reducing the
   deficit and decreasing the public debt to the level of 54 per cent for 2013 as well as reducing the current
   account deficit constitute the basic objectives of the coordinated monetary and fiscal policies of the country.
   The current-account deficit is expected to narrow to an average of 9.3% of GDP in 2010-11, from an
   estimated 15.6% of GDP in 2009.Thus, these objectives make up the main contours of the macro-economic
   framework within which the projections for all the other macroeconomic variables are drafted.
   The Macroeconomic program of the Government of Albania for 2011-2014 outlines that, along with the
   technological progress and structural reforms of the economy, the implementation of a series of efficient
   macroeconomic policies clearly oriented by the “philosophy” of boosting the economic growth through
   promoting the aggregate supply would give a significant push to the economy. Pursuing well-planned and
   well-coordinated macroeconomic policies and further deepening the economic-structural reforms, along
   with technological progress and accumulation of capital, shall ensure the continuation of this economic
   dynamics for at least a medium term period.
      The agricultural production, assuming normal climate conditions, for the upcoming period has been
   projected to grow by its historic average growth rates of 3.5-4 per cent a year.
      Industrial production, including extracting and manufacturing industry, is forecast to grow by round 8.9 per
   cent in real terms for the future medium term period.
      Construction for the upcoming medium term period is forecasted to have an average growth of 6 per cent
   per year.
      Services for the upcoming medium term period are forecast to grow by 7.1 per cent. The main
   contribution to this growth is expected to be made up by trade, hotel and restaurant, transport and
   telecommunication services.
      Gross capital formation for the 4 year period ahead is forecasted to grow by an average of 7 per cent each in
   real terms.
   Based on the above projections of the aggregate demand and supply, the average GDP growth in this
   baseline scenario for the four upcoming years is forecasted to be close to the level of 6.4 per cent.


   Challenges
   Albania has good growth potential in agriculture, fisheries, forestry, tourism, mining, and light industry.
   Sustainable growth that will benefit the entire population can be achieved, provided the country maintains
   stability and tackles its most pressing challenges which may be summarized as follows:
      The public sector remains in need of substantial strengthening;

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      Improvements of the country‟s infrastructure;
      Improving access to finance, particularly for SMEs;
     Progress with implementation of structural reforms necessary to maintain Albania‟s high growth
   potential.


   Opportunities
   Strong regulatory framework for financial institutions facilitates cooperation with banks to improve the
   business environment for small business.
   There is a strong public investment program which provides co-financing opportunities.
   The outlook of Albania‟s agricultural sector and development of rural infrastructure is improving.
   The Government of Albania attempts to improve the structure of public debt, and considers that financing
   the projects for the capital expenses from multilateral sources is expected to be the cost-effective form of
   borrowing for the government in the upcoming years. The Government believes it is essential to focus all
   attempts towards mobilizing the multi-lateral and bilateral sources for financing the projects.


   II. Overview of BSTDB Portfolio
   The Bank has made significant efforts to identify suitable operations for Bank financing. When necessary,
   BSTDB financing has been made available via the financial sector.
   As of end-December 2010 the Bank‟s portfolio of operations in Albania amounts to about SDR 54 million
   in 7 BoD approved operations. The outstanding amount is of SDR 26 million representing 4.54% of total
   Bank exposure.




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       Table 3: Current BSTDB Portfolio - BoD Approved Operations1
                                                                                                              USD
    No.              Operation          BoD            Amount           Signing          Amount          Outstanding
                                       Approval       approved                           signed           amount
        1         Trans-Balkan            16-Jun-00       1,333,333         20-Jul-00        1,333,333                 0
                  SME Equity Fund
        2         Balkan Accession       10-Aug-06         331,250          4-Oct-06          331,250           241,840
                  Fund
        3         Albtelecom               1-Feb-08      33,125,000        18-Apr-08        33,125,000       29,067,188

        4         Kurum                    1-Feb-08      26,500,000        18-Jun-08        26,500,000       10,600,000
                  International
        5         Emerging Europe         25-Sep-09       1,555,108        21-Jun-10         1,545,833           18,426
                  Accession Fund
        6         Hygeia Hospital         24-Sep-10      13,250,000       16-Dec-10         13,250,000                 0
                  Tirana
        7         Credins Bank            24-Sep-10       6,200,000       23-Dec-10          6,200,000                 0

                        TOTAL                            82,294,69                         82,285,416       39,927,454
                                                                 1


       III. Review of Country Strategy


       INTRODUCTION
       The current evaluation was performed by the Bank‟s Evaluation Office as per the respective Evaluation
       Policy. It reveals the performance of the Bank‟s 2007-2010 Country Strategy for Albania. Its goal is to
       provide accountability to the Board of Directors and Board of Governors as well as facilitate the decision-
       making by the Bank‟s Management and Boards on the eventual update of the country strategies.
       The evaluation of the respective country strategy compares the stated targets with results as of end of 2010,
       and provides a country-oriented analytical picture.


       PERFORMANCE OF ALBANIA COUNTRY STRATEGY 2007-2010
       The 2007-2010 country strategy for Albania was approved by the Board of Directors in early 2007,
       reflecting an in-depth independent evaluation of the implementation of the BSTDB‟s earlier strategies,
       conducted by the Evaluation Office in late 2006. The recent country strategy was aligned with the objectives
       of the Bank‟s Business Plan 2007-2010 and was therefore evaluated in its overall context.



1   As of December 31, 2010.
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   Overall, the implementation of the Country Strategy is Excellent, which is consistent with the Business Plan
   implementation. The implementation of the Strategy exceeded the volume targets over 2 times and achieved
   a rather balanced sector coverage, as shown in the table below.




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                         Table 4: BSTDB COUNTRY STRATEGY PERFORMANCE AT A GLANCE (2007-2010)


   Post Evaluation of 2007-2010 Country Strategy Albania (approved 04.02.2007)
                                2007- 2010 TARGETS                                             RESULTS (end of 2010)
      General                      Sectors                    Target operations:     Actual operations:     Evaluation Summary
                                                             Number approved/       Number approved/
                                                              number signed;          number signed;
                                                               USD approved/          USD approved/
                                                             USD signed (million)   USD signed (million)


   Finance large      1. Infrastructure (energy and                                                         1. Volume:
   and medium         telecom):                                    4-7/n/a                  5/5
   sized              (i)     Power networks, energy
   companies in                                                     34/30                  81/81            Approved number:
                      saving, medium size oil and gas
   export                                                                                                   100%
                      development, energy transportation
   generating                                                                                               Approved volume:
                      infrastructure, „downstream‟
   activities,                                                                                              238%
                      operations, public-private
   infrastructure     partnerships;                                                                         Signed number: n/a
   and financial      (ii)    Telecommunication
   sector                                                                                                   Signed volume: 270%
                      infrastructure upgrading
                      2. Transport (Rehabilitation of
                      roads, ports, railways)
                                                                                                            2. Sector coverage:
                      3. Manufacturing (textile)
                      4. Agribusiness (production,
                      sanitation, packaging,                                                                2.1. Albetecom
                      warehousing, quality control)                                                              (Telecom)*
                      5. SME sector (modernization of
                      equipment; diversification of                                                         2.2. Kurum

                                                                  13
BD2011-049a


              products and services)                    (General Industries)
              6. Other: feasible green field
              investments, post privatization        2.3. Emerging Europe
              programs and commercialization         Accession Fund
              of existing enterprises
                                                        (fund/equity)


                                                     2.4. Hygeia Hospital
                                                     Tirana
                                                        (Health)


                                                     2.5. Credins Bank
                                                        (FI/TF)


                                                     *(co-financed project)


                                                     3. Performance:


                                                     Excellent: Targets
                                                     generally exceeded,
                                                     good sector balance.




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BD2011-049a



   IV.            Priorities for 2011 – 2014
   Public Sector Investment Objectives:
   For the period 2011-2014, the government will continue to prioritize investments allocations to sectors such
   as education, health care, infrastructure and defense for the following purposes:
   Education:
   Capital expenses in this sector, in the period 2011-2014, shall mainly be focused in financing the pre-university
   education for:
        Construction of new schools;
        Re-construction of existing schools;
        Providing equipped laboratories;
        Providing internet to schools.
   It is worth mentioning that the amount allocated for constructions and re-constructions of the pre-university
   education schools are part of the Regional Development Fund, where local government units compete and are
   selected based on their project proposals according to central government criteria.
   Health care:
   The investments in this priority sector for the period 2011-2014, shall focus mainly on:
        Construction and re-construction of hospital premises;
        Construction and re-construction of primary care premises;
        Purchase of medical equipment and apparatuses.
   Infrastructure:
   Initially, it is worth highlighting the fact that the capital expenses in this sector have the biggest share of the
   total capital expenses for the period 2011-2014. The main directions of investments in this sector include:
      Investments in the national roads sector, such as the construction and rehabilitation of the main networks,
   as well as repairing and re-asphalting of national networks. Priorities of these investments are the
   constructions of the main transportation roads‟ corridors, as: 8th corridor, corridor Durres – Morine, ensuring
   the connection to the 10th corridor, north-south axes, Arber road, as branch of 8th corridor and the central
   axes of south.
        Investments in the extension and improvement of the Water and Sewage Utilities networks;
        Investments in the port infrastructure;
        Investments in the housing field.


   Areas for BSTDB Financing:
   The Bank‟s role and priorities are defined (i) in accordance with the priorities and targets laid out in its
   Medium-term Strategy and Business Plan 2011-2014 and (ii) country needs and objectives, as well as (iii) available
   resources, strategies and policies of BSTDB. In this respect, BSTDB will seek viable opportunities and will
   continue closely monitoring the developments in the Albanian economy in order to stand prepared to support

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BD2011-049a


    bankable projects in all sectors pertaining to the Bank‟s field of action. In addition the Bank shall seek co-
    financing opportunities with IFIs, public sector institutions and private partners.


    The BSTDB will focus in the next four years on providing support for the implementation of the
    Government program and priorities, while responding to market demand. The Bank will consider undertaking
    activities and providing services as may advance its purpose, paying special attention to activities promoting
    export of goods and services, and development of infrastructure, including energy efficiency. In addition,
    through selected intermediaries, the Bank would attempt to expand its financing programs in favor of SMEs.
    Based on the 2011- 2014 BSTDB Medium Term Strategy and Business Plan (MTSBP), the Bank would expect
    to approve about 1 new operation per annum during this period, for approximately EUR 12.6 million per
    year. Over the four year period, this implies around 4 to 5 approved operations for approximately 44 to 56
    million. With the Bank determined to raise the level of commitments (signed operations) to approved
    operations to over 85%, the Bank expects signings for 2011-2014 to be on the order of 3 to 4 operations for
    EUR 44.5 million (a range of EUR 39.1 to EUR 49.8 million).
    These indicative targets are based on the Base Case Scenario of the MTSBP, and given appropriate
    circumstances and sufficient operational opportunities the Bank would make efforts to exceed this level. In
    case of higher regional economic growth rates, increased demand for Bank funding, and an improved
    situation in financial markets, a phased increase in the average number and size of operations would allow the
    Bank to move towards achieving the targets envisaged under the High Case Scenario. Moreover, at the Mid-
    Term Review, depending upon performance and prospects, the above targets may be revised upwards2.
    In line with the Bank‟s strategy to increase operational activity in smaller shareholder countries, the Bank will
    insist that all operations meet criteria of sound banking principles on the one hand, and financial viability/
    economic sustainability on the other hand. Within these parameters, the Bank will explore the possibility of
    taking on additional risk- or risks- in order to facilitate the undertaking of additional operations. The greater
    „reward‟ that justifies the acceptance of more risk is that the Bank would participate in a larger number and
    volume of operations in smaller countries, and thus better fulfill its mandate to promote economic
    development, especially where needs are greatest.
    The Bank will consider undertaking activities and providing services in Albania as may advance its purpose,
    including but not limited to:
    -   Providing facilities in the form of well-balanced debt-equity finance and convertible loans;
    - Providing a range of banking activities and special products aimed at promoting the access of Albanian
    public or private enterprises to the international and domestic capital markets;
    -   Entering into appropriate financial sector operations.


    Trade Finance and Financial Sector
    Most of the BSTDB‟s trade finance program will be executed through financial intermediaries. By working
    through financial intermediaries, the Bank will also support the development of Albania‟s financial sector. The
    Bank will seek opportunities to locate financial intermediaries through which it will be able to promote its
    financial products, such as trade finance and SME finance or leasing.


2
 Under no circumstances would targets be revised downwards unless the lower case scenario of the 2011-2014 BSTDB Business
Plan were to be followed.
                                                            16
BD2011-049a


   Financial sector – The Bank will work to increase competition within the banking system, contribute to the
   corporate development of banks and, in specific cases, support emerging SMEs.
   In product terms, the Bank will consider the possibility to:
      Provide a lending and trade finance facility involving several local banks.
      Provide support in the development of the private banking sector through specific facilities with existing
   private banks.
      Consider the possibility of participation in the share capital of selected banks and leasing companies.
      Coordinate and cooperate with the IFIs in context of financial sector development.
   Trade finance is necessary to provide financing for increasing exports and expanding regional trade. Financing
   to exporting companies may help improve competitiveness and content of value added in exports. Financing
   trade particularly for promoting imports of capital goods and manufacturing equipment from other BSEC
   countries is important for the Bank‟s mandate.
   SME sector – is in need of medium term finance, which would promote modernization of equipment and
   diversification of products and services. In addition, job creation and income generation effects of SME
   sector development may have positive social impact.
   A core priority for the Bank remains the provision of financial support to SMEs.
   The Bank hopes to find suitable partners to support the development of leasing, as well. The Bank intends to
   use the leasing product not only for financing capital expenditure of SMEs but also for other companies as an
   effective financing tool for the promotion of regional trade. Medium-term credit lines opened to leasing
   companies for trade related purpose will enable them to offer their customers finance for capital expenditures
   on imports from other countries in the region.
   The Bank will continue to consider the option to take equity participations in selected financial institutions
   and funds, and will also seek to use quasi-equity products, such as subordinated loans.
   The Bank will also keep in regular contact with complementary international financial institutions (IFIs) such
   as EBRD, IFC, EIB, DEG and KFW to seek ways to coordinate activities and share experiences, given the
   opportunities which exist for joint involvement.


   Transportation
   Albania‟s needs for transportation and manufacturing investments are significant. In that respect, the BSTDB
   will continue to focus its activities on both of these sectors and try to identify transportation projects that are
   priority for Albanian government and that BSTDB can take part in financing such projects. In addition to the
   road construction and modernization projects, ports, airports, infrastructure projects for the development of
   health and tourism sectors and municipal projects will be given priority. Such projects may be financed under
   provision of sovereign guarantees by the Albanian authorities or under the PPP scheme, where possible.


   Manufacturing
   The Bank will also focus on identifying medium and large size investments in the country that helps to the
   development of general industries. Despite some developments in recent years, Albania still needs substantial
   amount of investments in general industries. Agribusiness and textile are the major industries that Albania has
   competitive advantage. Pro-active marketing efforts will be directed to these two specific sectors for business
   generation. The Team will focus in the next four years on providing financial support to large and medium
                                                         17
BD2011-049a


   sized companies engaged in particular in tax and export generating activities with high economic and
   employment impact.

   The textile industry is the largest job creator among the light industries. The main activities in the sector are
   focused on production under outward processing regime of clothes and footwear uppers, which comprise the
   majority of the country's exports.
   Albania is one of the leading shoe and leather producers in the world, and it has an ideal location for exports
   to the Italian, Balkan and European markets. With free trade agreements being signed with the Balkan
   countries and the EU, Albania offers unrestricted exports opportunities.

   The agribusiness sector is in need of adequate medium term financing to expand operations and to increase
   exports. Agribusiness is one of the economic activities recording one of the highest rates of growth in recent
   years. Food and fish processing has been one of the fastest growing subsectors of the Albanian food
   processing industry and is export intensive.
   Increased activity in processing agricultural products, together with development of adjacent services
   (packaging, marketing, distribution) is important for the revitalization of agriculture. Key investment
   opportunities are the establishment of facilities for production, sanitation, packaging, and warehousing, as well
   as laboratories for quality control.

       The meat processing industry: covers production of a wide variety of salami and sausages from beef, veal and
       pork meat and by-products mixed in different proportions, with poultry occasionally used as filler.

       Fish processing: has also traditionally been a strong industry with considerable export potential.

       Olive oil: Albania is a country rich in olive trees, with an estimate of about 4.1 million roots. Olive oil
       produced in Albania is of high quality and has a big export potential.

       Herbs and spices: About 30% of the European medicinal flora is found in Albania. Albanian government
       records indicate that about 250 species are harvested for commercial/export purposes, used for both
       medicinal and culinary purposes. There are around 40 processors or dealers and about 10 exporting
       companies.
       The most important Albanian herbs and spices exported, directly or indirectly, to European countries and
       USA are: Sage, Oregano, Red Juniper, Black Juniper, Hawthorn, Laurel, Thyme, Winter Savory, Wild
       Rose, Great Yellow Gentian, Small-Leafed Linden, Myrtle, Wild apple and Blackthorn.


   Tourism related Real Estate
   In recent years, there have been some developments in real estate sector. Construction of shopping malls,
   residential and office buildings and logistics centers may be attractive areas for financiers within the next four
   year period. The Team will also focus on these sectors to identify eligible projects to finance or to participate
   as an equity holder.
   Tourism is one of the sectors that Albanian government is willing to develop in forthcoming years. The
   country has large potential for tourism which is yet to be explored. Infrastructure is the main hurdle in front
   of tourism sector to develop. The Team will explore the possibilities to finance projects that would contribute
   to the development of this sector.
   However, due to the relatively smaller size of the economy, and relatively smaller size of the investments, the
   BSTDB expects to close not more than 3 operations in four years‟ time in general industries, transportation,
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BD2011-049a


   tourism and real estate sectors. The Bank will focus not only on debt financing but on equity and mezzanine
   financing as well where it is deemed feasible.


   Energy and Infrastructure
   Given the E&I development needs, so long as projects are „bankable‟, the Bank will be keen to offer support.
   This applies to all key infrastructure sectors, including energy (especially renewable) and electricity, transport
   infrastructure, telecommunications, and municipal infrastructure. The existence of an appropriate competitive
   environment and regulatory framework will be an important consideration in ascertaining „bankability‟
   alongside development impact.
   BSTDB will be willing to explore if the Albanian Government will be able to provide the sovereign guarantees
   for E&I projects. Should a sovereign guarantee be necessary and possible, it would only be sought for an
   extremely high priority activity in which the guarantee would also serve as a signaling mechanism of the
   Government‟s commitment to/ ownership of the operation in order to facilitate greater resource mobilization
   and broader participation.
   In case of the consideration of financing at the privatization stage of any E&I objects, the presence of a
   strategic investor would be key factor for the Bank, and the Bank‟s assistance would likely come in the form
   of post-privatization financing to upgrade facilities and restructure.
   Other involvement in infrastructure operations will need to be via creative arrangements such as public-
   private partnerships.
   The Bank will continue to ensure that all BSTDB E&I operations in Albania meet sound banking principles
   and comply with the Bank‟s Environmental Rules and Procedures and incorporate, where appropriate,
   Environmental and Social Action Plans.
   The Bank will also maintain its contacts with complementary international financial institutions (IFIs) and
   organizations such as EBRD, IFC, KfW, DEG, OEaB, etc. to seek ways to coordinate activities and share
   experiences.


   BSTDB Energy and Infrastructure strategy in terms of banking instruments:
      Project Finance limited recourse transactions;
      Corporate recourse financing transactions;
      Exploration of financing in form of Equity;
      Co-financing of transactions with other international financial institutions, and commercial banks;
      Participation in the syndicated facilities for the E&I deals in Albania


   Areas of particular focus in Energy and Infrastructure:
      Energy (including renewable),
      Electricity,
      Transport infrastructure,
      Telecommunications,
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BD2011-049a


      Municipal infrastructure.




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