WB: Population decline and aging a challenge for fiscal sustainability, tax collection a priority

2025-11-21 15:28:00, Ekonomi CNA

WB: Population decline and aging a challenge for fiscal sustainability, tax

In the wake of a fiscal peace that the government is widely discussing in this fiscal package, it seems that international financial institutions are emphasizing the other side of the scale, that of tax collection and strengthening measures for fiscal compliance.

The World Bank presented the Public Finance Review of Albania, a report that emphasizes strengthening fiscal sustainability for a resilient economy and human development. The report focuses on a number of aspects related to navigating risks, securing growth, and the macro-fiscal landscape.

Specifically, the World Bank states that Albania has achieved macroeconomic stability, but persistent structural challenges need to be addressed to maintain long-term growth. Average annual GDP growth reached 3.2 percent during the period 2014–2024, driven mainly by domestic consumption, tourism and construction, where post-earthquake reconstruction and foreign investment have played a key role in recent years.

“Poverty has been reduced by 20 percentage points, although the redistributive impact of fiscal policy remains relatively weak. Gender inequalities and high youth unemployment persist. At the current pace of reforms, annual growth is expected to slow in the long term, reaching only 1.5 percent in 2050, due to a declining working-age population, weak productivity and human capital, and declining rates of return on capital accumulation,” the report says.

Below are some excerpts from the report.

Fiscal discipline

While adherence to fiscal discipline has kept Albania’s historically high public debt under control and made its fiscal position sustainable, the country remains exposed to macroeconomic and currency-related risks. Albania spends less than other countries, collects less revenue, and has fiscal deficits at similar levels, yet has consistently had high debt.

An expansionary fiscal policy stance, undertaken as a stabilization measure in response to the 2008 global financial crisis – combined with ongoing problems in the energy sector and weak financial controls – contributed to rising debt and the accumulation of arrears by 2015.

Since then, and after each shock, Albania has rebuilt strong fiscal shock absorbers that enabled effective responses to the 2019 earthquake, the COVID-19 shock in 2020, and the energy crisis in 2022.

Fiscal discipline, including the adoption of several fiscal rules since 2016, has played a critical role in narrowing the fiscal deficit. As a result, public debt fell to 54 percent of GDP in 2024. Although debt remains vulnerable to risks, the fiscal position is supportive of sustainability and fiscal rules are expected to continue to mitigate public debt over the medium term.

Fiscal risks

Fiscal risks stem from demographic pressures, contingent liabilities, climate impacts, and inefficient public investment – ??exacerbated by weaker redistributive policies compared to those of other similar countries.

Albania’s shrinking and aging population poses challenges to labor supply and fiscal sustainability by increasing pension and healthcare costs. Contingent liabilities stemming from state-owned enterprises (SOEs) and public-private partnerships (PPPs) – particularly in the energy and transport sectors – add to fiscal risks. Climate change and natural disasters, such as frequent floods and droughts, also impose high fiscal costs. The efficiency of public investment remains an ongoing concern.

Fiscal framework

The current fiscal framework fails to address emerging fiscal risks and accelerate revenue convergence with the EU. In the context of macroeconomic stability, fiscal policy should ensure that resources are directed towards priority areas, that revenue is raised in a cost-effective and least distortive manner, and that sufficient fiscal buffers are maintained in the context of increasing risks.

In the short term, priorities should include improving tax collection and tax compliance to increase revenues; increasing allocations to human capital sectors to strengthen productivity and economic growth; strengthening the efficiency and transparency of spending in PPPs; improving the governance and accountability of state-owned enterprises; improving the quality of public investments; and strengthening debt management.

In the medium term, Albania will need to increase spending in growth-enhancing sectors, strengthen climate adaptation and disaster preparedness, and improve social protection – while also preserving the fiscal sustainability of the pension system. The establishment of an independent fiscal council would strengthen the credibility and enforcement of Albania’s fiscal rules./ Monitor Magazine