# **I. Introduction**

**Albania’s economy is expanding and the economic outlook is positive** . Following a slowdown in growth since the global economic crisis, the Albanian economy has been accelerating in recent years and is expected to grow at a rate of 3.6 percent in 2017, driven mostly by private investments and consumption.

**Faster economic growth has translated into improvements in living standards** .  Although data availability remains a constraint to measuring poverty post 2012,<sup>2</sup> recent estimates suggest that the poverty rate (at US$ 5.5/day, 2011 PPP) has been gradually decreasing. After a rise during the global economic crisis and a negative across-the-board consumption growth, poverty has been declining (Figure 1), mostly linked to improvements in labor markets.

**Figure 1. Poverty rate in Albania (US$ 2.5/day, 2005 PPP) and Private Consumption per Capita**

<!-- Start of picture text --> 8 190,000<br>7<br> 185,000<br>6<br>5 180,000<br>4<br>3 175,000<br>2<br> 170,000<br>1<br>0 165,000<br>2012 2013 2014 2015 2016 2017 2018<br>Poverty Headcount ($2.5/day PPP)<br>Private Consumption oer capita (constant LCU)<br>Percentage Points<br><!-- End of picture text --> Source: Calculations based on ECAPOV harmonization, using 2012-LSMS. Projection using neutral distribution (2012) with pass-through = 0.87 (Med) based on private consumption per capita in constant LCU. Poverty projections start in 2013; projections on private consumption start in 2016.

**Beyond the role of labor markets, the fiscal system can also have important effects on living standards.** Evidence across countries has shown that taxes and transfers can have quantitatively important effects on poverty and inequality. Understanding how the fiscal system in Albania impacts households, beyond the specific impact of one intervention but from a more comprehensive standpoint, can shed light on its redistributive effect and contribute to the agenda of growing the middle class in Albania.

**Moreover, sustaining economic growth and poverty reduction in Albania calls for macroeconomic stability and delivering on the structural reform agenda with an equity lens** . This includes efforts towards fiscal consolidation, as well as judiciary reforms, energy reform, enhancing public

investment management, and improving skills. As part of this reform agenda, the government plan for the next four years, with fiscal stabilization as a central objective, includes changes to specific fiscal interventions at the individual level, such as the personal income tax. As part of the reform process, it is key to understand the distributional impacts of policies and, if relevant, ensure that mitigation mechanisms are in place to protect the less well-off.

> 2 The latest LSMS survey, which is the household survey used to measure national poverty, was last carried out in 2012. The country has collected the income-based EU SILC data for the first time with results to be released by October 2017, including the reporting of indicators aligned to those of EU countries. The World Bank is supporting capacity strengthening in the statistical agency to also measure and monitor welfare using the Household Budget Survey.

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