Three Steps to Help Albania Withstand the Financial Impacts of Disasters and Crises

Albania
Europe and Central Asia
15 January 2021

In 2019, Albania experienced a series of earthquakes, including a major one; then, amid reconstruction efforts in 2020, it was hit by the COVID-19 pandemic. Confronting multiple increasing needs, the government of Albania supported the poor and those affected by disasters and crises, including businesses. To do so, it tapped into its fiscal reserves, reallocated budgets toward urgent priorities, and relied on external assistance. Many of these measures were ad hoc.

In September 2020, jointly with Albania’s Ministry of Finance and Economy, the World Bank completed a diagnostic of disaster risk finance in Albania[1]. This effort sought to identify financing gaps in—and recommend ways to improve—the country’s financial preparedness for disasters.

Disaster risk management is among Albania’s key policy priorities, and the Albanian government carried out a series of reforms shortly before the earthquake: for instance, it enacted a new Law on Civil Protection, streamlined institutional frameworks, decentralized post-disaster functions, and put in place structures for contingency funds at the local and line ministry level.

Based on the AIR Worldwide risk profile, the diagnostic estimates that earthquakes and floods could cause on average US$147 million in damage per year with earthquakes having the biggest impact. A catastrophic earthquake—such as a 1-in-100-year return period[2] earthquake—could cause damages of over US$2 billion. Figure 1 demonstrates the combined potential losses from earthquakes and floods. Figure 2 showcases the concentration of exposure in larger cities.

Figure 1. Estimated Damage from Earthquakes and Floods in Albania

Source: Risk profile is from AIR Worldwide’s catastrophe models for earthquake and flood in Albania. Values were provided in ALL, converted to US$ using the latest rate of 1 to 102.5, US$ to ALL exchange rate. Index factors have been applied and all reported values reflect 2020 estimates.

Figure 2. AIR’s Modelled Exposure Database

When insurance penetration is low, governments shoulder most of the costs in the aftermath of a disaster. The sources of these costs vary but can include emergency response, rehabilitation of public assets, restoration of public services, support to uninsured households and small enterprises, and fiscal transfers to local governments.

When financing is unavailable or access is delayed, disaster impacts can be unnecessarily high, worsening economic slowdowns and poverty and leading to budget volatility. While Albania has some access to prearranged financing instruments, such as reserve funds, major events could force the government to reallocate budget, borrow, and rely on external assistance (figure 3). In fact, given the available financing, a potential financing gap caused by both earthquakes and floods could exceed on average US$130 million per year.

Figure 3. Risk Layering in Albania

Note: Green = budget retention instruments; blue = risk transfer; grey = unavailable; line pattern = partially available or partially operationalized; NCPA = National Civil Protection Agency.

The government, led by the Ministry of Finance and Economy, decided to take three immediate steps to address the identified gaps[3]:

Step 1. Develop a national Disaster Risk Finance Strategy. This strategy will identify the country’s priorities and determine ways of combining different risk financing instruments to cost-effectively address these priorities.

Step 2. Learn lessons from financial management of the COVID-19 pandemic. Jointly with the Ministry of Finance and Economy, the World Bank is preparing a COVID-19 expenditure analysis. Building on the findings of the disaster risk finance diagnostic, the analysis will strengthen the evidence regarding the costs and benefits of post-disaster instruments such as budget reallocations and will support the government in developing policies to minimize these costs.

Step 3. Make efforts to close the disaster protection gap. Through the Ministry of Finance and Economy and Albanian Financial Supervisory Authority, Albania has worked on preparing a draft law on mandatory earthquake insurance for residential buildings. The law is currently under internal discussion in the government, which will also define the next steps.
 
Such efforts are critical to ensure Albania is ready for disasters and crises to come.

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[1] This diagnostic was developed within broader work on disaster risk management in Albania through technical assistance funded by the Japan–World Bank Program for Mainstreaming Disaster Risk Management in Developing Countries through the Global Facility for Disaster Reduction and Recovery. The diagnostic also complements other efforts to promote financial preparedness to disasters, such as the work on earthquake insurance that follows the findings of the World Bank’s 2014 Albania Financial Sector Assessment Program.

[2] The return period is the estimated time between losses of a certain size occurring. For example, a 1-in-10-year return period refers to losses that are expected to be exceeded once per 10 years—i.e., in any given year there is a 10 percent probability of such losses at least as great as this. The estimates do not mean these disasters will occur only once every 10 (or 20 or 50) years.

[3] This work will be supported by the State Secretariat for Economic Affairs (SECO) through the World Bank-SECO Sovereign Disaster Risk Financing and Insurance Program.

Photo Credit: Gent Shkullaku. A flooded region in Shkodra, Albania (2021). 

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