ALBANIA

Albania was established as a unitary parliamentary republic since the 1998 constitution, amended on 13 January 2007. The unicameral Parliament, “The National Assembly”, consists of 140 members and is responsible for the election of the President and the Prime Minister. Local governments are founded upon the basis of the principle of decentralisation of power and according to article 13 of the constitution, they exercise this principle in conjunction with the principle of local autonomy.

Regions and municipalities represent “Local Government Units” (LGU), as specified by articles 108 and 115 of the Constitution. Local governance is exercised through the municipal council (Këshilli Bashkiak), a deliberative body at the municipality level while the executive power is undertaken by the mayor. Councillors and mayors are both elected by direct universal suffrage for a four-year term. The latest local elections were held on 30 June 2019.

Regions play a crucial role in subnational governance as they are the unit in which regional policies are constructed and harmonised with national policies. However, regions are not full self-governing entities since they are not directly elected by universal suffrage but emanate from their constituent municipalities. This does not prevent them from having their own budget and administration, although with limited responsibilities. The representative organ of a given region is its regional council, composed of representatives from elected organs of municipalities in proportion to the number of inhabitants (with at least one representative per municipality). Representatives always include the municipal mayors, and also other members can be appointed from among the counsellors of each municipal council.

The Republic of Albania had a highly centralised model until the early 1990s. A first step towards a more decentralised structure was taken with the creation of LGU, which were recognised in the 1998 constitution. Further progress was made in the period between 1993-2003, starting with the presentation of the National Strategy for decentralisation and Local Autonomy in 1999, which attempts to increase LGU’s capacity to manage local infrastructure and services. This process was followed by the ratification of the European Charter of Local Self- Government in 2000, as well as the adoption of a legislative package in the same year, which included the New Organic Law on Local Government no. 8652/2000. The law introduced guiding principles on the organisation and functioning of LGU. Other organic laws, such as law no. 8654/2000 on the Organisation and Functioning of the Municipality of Tirana and law no. 8653/2000 on Administrative-Territorial Division marked the end of the previous District Councils.

As part of the process to enter the EU, the European Commission made requirements to grant Albania candidate status in 2012, including the sustainability of LGUs and the consolidation of democracy at the local level. In this context, the Republic of Albania introduced new legal basis for decentralisation, including territorial and administrative reforms in 2014 (law no. 115/2014 On Administrative-Territorial Division of the Local Government Units in the Republic of Albania), the Public Financial Management Strategy 2014-2020, the National Crosscutting Strategy for Decentralisation and Local Governance (NCSDLG) 2015-2020 and the new law on Local Self-Governance no. 139/2015 which further details the duties and power of subnational governments, granting them a more prominent role in the provision of public goods and services.

TERRITORIAL ORGANISATION
MUNICIPAL LEVEL	INTERMEDIATE LEVEL	REGIONAL LEVEL	TOTAL NUMBER OF SNGs (2021)
61 municipalities (bashkitë)		12 regional councils (qarqe)
Average municipal size: 46 525 inh.
61		12	73

OVERALL DESCRIPTION: The subnational governments of Albania comprises 12 regions or counties (qarqe) and 61 municipalities (bashkitë). This administrative-territorial organisation was approved on 31 July 2014.

REGIONAL LEVEL: The average regional population was 234 000 inhabitants in 2020 with around 53% of the population living in the three largest regions (Tiranë, Fier and Durrës). There are large economic disparities between regions, with about 43% of the total GDP in 2019 coming from the largest region, Tiranë, while the poorest region of Kukës contributed to around 1.62% of total GDP.

MUNICIPAL LEVEL: The 2014 territorial reform reduced the number of LGUs from 373 (308 communes and 65 municipalities) to 61 new municipalities. In 2020, the average size of a municipality was 46 525 inhabitants. Large municipalities with over 100 000 inhabitants accounted for 48% of the total population in Albania, while medium municipalities (between 40 000 and 100 000 inhabitants) represented 24% of the population, and small municipalities with less than 40 000 inhabitants representing 28% of the population. In 2019, around 29% of the population lived in the capital city Tirana. The capital city has no special status since the repeal of the law no. 8654/2000 “on the organisation and functioning of the municipality of Tirana” in 2015. Some proposals have been made to prepare a specific law for the capital city, but as yet, no draft law has been prepared.

Municipalities can be divided into several administrative units (njësia administrative) that have traditional, historical, economic and social links, most of them being former communes. They comprise towns/cities (qytete) and villages (fshatra). Cities can be further subdivided into neighbourhoods (lagje). The 61 municipalities so far encompass 58 cities, 369 administrative units and 2 998 villages. Each administrative unit is part of the municipal administration and is directed by an administrator, who is appointed by the mayor.

HORIZONTAL COOPERATION: Despite the Constitution, which grants LGUs the right to form unions and joint institutions with one another, horizontal cooperation is not widespread. The programme “Reinforcing Local and Regional Government Structures in Albania – Phase I”, established by the Council of Europe in cooperation with the Swiss Agency for Development and Cooperation (SADC) in 2010, aimed at improving decentralisation and fostering inter-municipal cooperation in Albania. The programme comprised raising awareness campaigns among LGUs and a package, including a toolkit, guide, training materials and case studies to facilitate the implementation of inter-municipal cooperation in the country. The “Regional Development Programme – Albania” of the SADC in 2019 also aimed at supporting inter-municipal cooperation in Albania through technical assistance and capacity-building measures. Additionally, a new law on regional development and cohesion (law no. 102/2020) introduced several instruments to encourage regional cooperation, in order to increase efficiency of the social and economic development of regions.

STATE TERRITORIAL ADMINISTRATION: Albania is administratively divided into 36 districts (rethe) and 12 prefectures. The prefectures are headed by prefects who are appointed by the Council of Ministers. These structures are deconcentrated levels of the state. They aim to supervise LGUs activities on behalf of central government.

Subnational governments are assigned exclusive and delegated competencies, according to the subsidiarity principle. Regions have few competences compared to municipalities. Their main function is to coordinate and harmonise national policies with LGUs, although they do not have hierarchical power over municipalities. The regions’ exclusive functions consist of developing and implementing regional strategies and policies. Regions can also be called upon to provide services delegated by the central government, as well as by municipalities, according to an agreement between them. Municipalities have exclusive and delegated competences. Some municipalities have also expanded competencies (i.e. additional powers given to a municipality or a group of municipalities) defined in the law.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	Regional level	Municipal level
1. General public services (administration)	Regional administration	Municipal administration; cadastral note (delegated); civil, voter and business registrations (delegated)
2. Public order and safety		Local emergency cases
3. Economic affairs / transports	Regional development strategies and plans; Urban development of the region; Regional urban cadastre; Maintenance of the rural roads	Local economic development programs; Public markets; Local roads; Local public transport
4. Environment protection		Public places and parks; Protection of the local environment; Protection of forest within the framework defined by the central government (delegated)
5. Housing and community amenities		Waste collection and treatment; Water supply and sewerage; Public lighting; Local heating; Social housing; Urban and rural planning; Land exploitation and development; Building regulations and standards for building control
6. Health	Management of health funds from the central government	Primary healthcare and public health
7. Culture & Recreation		Cultural and leisure activities
8. Education	Management of central government funds for the maintenance of higher education facilities	Pre-school, primary and secondary schools (including the registration and licensing of educational institutions, employment, salary payment and training of instructors and education administrators)
9. Social Welfare	Management of the regional unit for protection of children’s rights.	Family social services; other social welfare services (including the registration and licensing of these care centres, employment, salary payment and training of social welfare professionals); Distribution of social assistance payments (excl. pensions) (delegated)

Scope of fiscal data: 61 municipalities and 12 councils of regions.

SNA 2008

Availability of fiscal data: High

Quality/reliability of fiscal data: High

GENERAL INTRODUCTION: Financial autonomy of subnational governments in Albania is provided by a constitutional mandate and other legislature including law no. 9632/2006 on local taxes, law no. 9896/2008 on LGUs’ borrowing and law no. 68/2017 on local self-governance finance. This legal framework sets the basis to ensure the adequacy of financial resources to subnational governments for the financing of their functions and competences. Until the adoption of law no. 68/2017 the financial autonomy of subnational governments was limited and the historical underfunding of subnational governments persisted. This new legislation brought together the principles and rules of fiscal autonomy, especially the revision of conditional transfers and shared taxes between local and central government.

Subnational government expenditure by economic classification
	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure	860	6.2%	18.7%	100%
Inc. current expenditure	658	4.7%	18.4%	76.4%
Compensation of employees	202	1.4%	19.9%	23.5%
Intermediate consumption	129	0.9%	29.1%	15.0%
Social expenditure	257	1.8%	16.3%	29.8%
Subsidies and current transfers	69	0.5%	30.6%	8.0%
Financial charges	0	0.0%	0.1%	0.0%
Others	0	0.0%	0.0%	0.0%
Incl. capital expenditure	202	1.4%	19.6%	23.5%
Capital transfers	1	0.0%	4.1%	0.1%
Direct investment (or GFCF)	201	1.4%	19.9%	23.4%

EXPENDITURE: In 2020, there was a rise by about three percentage points in subnational total expenditure as a share of public expenditure compared to 2016 (15.9% in 2016), which reflects the decentralisation strategy that the country has undertaken since 2017. However, subnational expenditure as a share of public expenditure and GDP are below the EU27 average (34.3% and 18.3% respectively) and the OECD average (36.6% and 17.1% respectively). Social expenditure accounted for almost 30% of subnational expenditure, reflecting the transfer of competences for social protection from the central government to municipalities, while staff expenditure represented 23.5% of subnational expenditure in 2020.

DIRECT INVESTMENT: Direct investment in Albania represented 23.4% of the subnational expenditure in 2020. This figure has decreased compared to 2016 (26.9%) but remains high when compared to the EU27 average (9.9% in 2020) and OECD average (11.3% in 2020). The involvement of subnational governments and local actors in investment has been mainly focused on infrastructure, especially the construction and rehabilitation of local roads and public spaces. Although investing is a key function of subnational governments compared to management responsibilities, the weight of subnational investment in public investment remains low, particularly compared to the EU27 average (54.4%) and the OECD average (54.6%). The aftermath of natural disasters in 2019 also urged local investment into housing reconstruction. The decentralisation strategy promotes the use of public private partnerships in the provision of social housing, with municipal governments as key actors in reaching these agreements.

Subnational government expenditure by functional classification
	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total expenditure by economic function	860	6.2%	-	100%
1. General public services	106	0.8%	14.3%	12.3%
2. Defence	0	0.0%	0.0%	0.0%
3. Security and public order	31	0.2%	10.7%	3.6%
4. Economic affairs/transports	146	1.0%	21.7%	17.0%
5. Environmental protection	34	0.2%	74.8%	3.9%
6. Housing and community amenities	197	1.4%	36.2%	22.8%
7. Health	0	0.0%	0.0%	0.0%
8. Recreation, culture and religion	20	0.1%	34.3%	2.4%
9. Education	102	0.7%	19.2%	11.8%
10. Social protection	223	1.6%	9.9%	25.9%

Among other aspects, the decentralisation process in Albania has resulted in parts of the social protection and social care system being transferred from the central government to municipalities. This results in social protection expenditure being the highest subnational expenditure item in 2019 (25.9%). Housing and community amenities, economic affairs/transports, followed by education and public services were among the other most significant expenditure items of subnational governments in 2019, accounting for almost 64% of total subnational government expenditure.

Subnational government revenue by category
	Dollars PPP / inhabitant	% GDP	% general government	% subnational government
Total revenue	787	5.6%	21.5%	100%
Tax revenue	152	1.1%	5.9%	19.0%
Grants and subsidies	581	4.2%	-	73.8%
Tariffs and fees	52	0.4%	-	6.6%
Income from assets	1.8	0.0%	-	0.2%
Other revenues	0.0	0.0%	-	0.0%

OVERALL DESCRIPTION: The structure of total revenue of subnational governments indicates that fiscal autonomy remains a challenge in Albania. In 2020, subnational government revenues were dependent on the central government with a significant share of grants and subsidies (73.8%) compared to 19% of tax revenue. The share of grants and subsidies is high when compared to the EU27 and OECD averages (46.6% and 53.3% respectively). In contrast, tax revenue is low compared to EU and OECD averages (40.1% and 42.4% respectively). Electronic tax filing was also introduced and was made mandatory for all taxpayers and taxes. This initiative aimed to raise additional revenue for subnational governments in Albania in 2021.

TAX REVENUE: While regions do not have access to an autonomous tax authority and do not, by law, directly benefit from a share of nationally-collected taxes, municipalities receive both shared and own-source taxes. However, municipal tax revenue accounted for only 5.9% of public tax revenue and 1.1% of GDP, compared to 27.1% and 7.2% in the EU in 2020 respectively. Shared taxes include 25% of the motor vehicle tax, 97% of revenue from the property transaction tax, 25% of revenue from the used vehicle circulation tax, 5% of revenue from the mineral rent tax and 2% of the yield of the Personal Income Tax (PIT).

Own-tax revenue includes the tax on immovable property, the small business tax (SBT) and other minor local taxes. Property tax is an important source of own revenue for subnational governments, accounting for 31% of subnational government tax revenue and 6% of subnational government revenue in 2020. The share of property taxes in GDP (0.3%) remains low relative to the OECD average (1%). This is mainly due to a lack of accurate information on land ownership, which makes it harder to collect property taxes. Municipalities have the possibility to increase or decrease the indicative level of the property tax for every applicable category of taxpayers by 30%. The local infrastructure tax was the second in importance in 2020 as it accounted for 32% of total subnational government tax revenue. Finally, the small business tax accounted for about 2% of municipal tax revenue and has been in sharp decline in recent years (it accounted for 6% of municipal tax revenue in 2016 and was the largest tax revenue several years ago). Other local taxes are a tax on billboards, a tax on donations, inheritances and testaments, and revenues from local lotteries.

GRANTS AND SUBSIDIES: Central government transfers include unconditional and conditional grants. The concept of unconditional transfer was adopted in the State Budget Law of 2001 and developed further with the 2002 fiscal reform package. Subnational government grants consist mainly of current grants, which represent 86.1% of total subnational government grants and 63.6% of subnational government revenue. Unconditional grants are the largest share of subnational government revenue. Municipal unconditional transfers are allocated through a formula published in the annual budget law and which include several variables (population size and density, the number of pupils in the pre-university education system, municipal fiscal capacity) as well as an equalisation threshold (horizontal equalisation). Regional unconditional transfers include quotas from the budgets of constituent municipalities (0-3% of annual budget) for the performance of shared and own functions.

After the declaration of the state of natural disaster in 2019, the government of Albania introduced the Reconstruction Fund that consisted in five programs for the post-earthquake reconstruction. The funds were allocated to LGUs in the form of unconditional grants in five categories: i) New facilities development program; ii) public infrastructure construction program; iii) housing fund creation program; iv) Reconstruction Grants Program; v) program of social and economic recovery measures.

Conditional transfers are given for projects that are considered of local, regional or national interest. Regions receive conditional transfers for the performance of the functions and powers delegated by municipalities. A competitive grant scheme was introduced in 2006 as a mechanism to increase performance and objectivity in funding subnational government investments. In 2010, this scheme was substituted by the Regional Development Fund (Fondi i Rajoneve) which operates as a vertical equalising instrument to manage conditional grants.

OTHER REVENUE: Municipalities and regions can collect fees and user charges for public services. The fees compensate for the cost of the service provided, and municipalities can only charge fees for services whose consumption is measurable and attributable to users or beneficiaries. The amount is determined by the subnational government council unless stated otherwise by specific laws. The main fees and charges are related to the occupation of public space, waste collection and disposal, water supply and sewerage, irrigation and drainage, licenses and permissions and authorisations defined by laws. Overall, the weight of tariffs and fees in subnational government revenue in Albania (6.6%) remain low by international standards (13.3% in the OECD and 10.3% in the EU27 in 2020). Subnational governments may raise revenues from the rental or lease of locally owned assets. In addition, revenues from economic activity such as dividends to the subnational government from publicly-owned but commercially-operated enterprises are also classified as property income.

Subnational government fiscal rules and debt
	Dollars PPP / inh.	% GDP	% general government debt	% SNG debt	% SNG financial debt
Total outstanding debt	651	4.7%	5.3%	100.0%	-
Financial debt	312	2.2%	3.2%	48.0%	100.0%
Currency and deposits	0	-	-	0.0%	0.0%
Bonds / debt securities	0	-	-	0.0%	0.0%
Loans	313	-	-	48.0%	100.0%
Insurance pensions	0	-	-	0.0%	-
Other accounts payable	338	-	-	52.0%	-

FISCAL RULES: National and subnational budgetary systems are governed by the same legal and regulatory framework. Municipalities and regional councils approve their own budgets, which are subject to a conformity/legality check by the Prefect. The annual budgets of subnational governments must be balanced, except where a loan has been approved for financing an investment project. The new 2017 law on local finances reinforces reporting requirements, tightens monitoring, and provides mechanisms for dealing with local governments that face financial difficulties and financial stress. This legislation also stipulates the obligation for municipalities to develop financial rehabilitation plans when they face significant outstanding financial obligations, which will be monitored by the Ministry of Finance and Economy.

DEBT: Law no. 9936/2008 on local government borrowing was adopted to end the prohibition on local short-term and long-term borrowing with the objective of increasing subnational government fiscal autonomy. However, borrowing remains strictly controlled by the central government. All borrowing has to be approved by the Minister of Finance. Short-term debt is authorised to finance cash flow budget deficits and limitations are defined in the law. Long-term debt is authorised to either finance capital investment serving an essential local government function (“Golden Rule”) or to refinance outstanding long-term indebtedness previously issued to finance capital expenditure. Limits are the following: (i) the ratio of operational surplus of the previous fiscal year to the amount of debt should be at least 1.4:1; (ii) the ratio of debt stock to total operational revenues shall not be higher than 1.3:1; and (iii) the maximum annual limit of debt service to the local government’s average fiscal revenues of the last three years shall not exceed 20%. Besides these limitations, the total of short-term and long-term debt is subject to the national annual debt law, which implies that additional requirements and limitations can be imposed on subnational governments in order to shore up the sustainability of public finances.

According to law no. 68/2017 on “Local Self-Government Finances”, four categories distinguish financial difficulties of municipalities: (i) a municipality is considered to have financial problems when the ascertained outstanding liabilities constitute 15 - 25 % of the approved annual expenses; (ii) the municipality is in financial trouble when the delays in the payment of liabilities are ascertained also in the following month and the value of the stock of the liabilities increases progressively above the level of 25% of the approved annual expenditures; (iii) a municipality is in serious financial difficulties when long-term debts and outstanding liabilities account for over 80% of annual expenditures; and (iv) the municipality is insolvent when the ratio of long-term debts and outstanding liabilities to the approved budget is higher than 1:3. In 2020, 12 municipalities were considered to have financial problems, 9 municipalities had financial difficulties, and Kavajë is named as the only municipality with serious financial difficulties. The remaining 39 municipalities did not appear to have financial problems.

Subnational outstanding debt remains low. It accounted for 4.7% of GDP in 2020 (13.9% the EU27 average) and 5.3% of public debt (15.4% in the EU27). The composition of outstanding debt as share of the total subnational government debt has also changed, with an important decrease of the share of loans from 60% in 2016 to 48% in 2020. In 2020, the remaining 52% of the total outstanding debt corresponds to other accounts payable. It should be noted that the level of debt widely varies among municipalities, with Tirana, Kavajë and Vorë representing around a third of the total debt in 2020.

TERRITORIAL MANAGEMENT OF THE CRISIS: The pandemic had a negative and significant economic impact in Albania, as the country was still recovering from the 2019 earthquakes. Although the management of the pandemic was headed by the central government, municipalities were at the frontline of implementing preventive measures and providing support to the local populations in Albania during the COVID-19 crisis. Subnational governments had the responsibility to identify populations at risk and to provide them with humanitarian aid in times of emergency, in coordination with higher levels of government. This was established by the Civil Protection Law no.45/2019.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: Subnational governments introduced economic and social measures, which aimed at alleviating the pressure on local businesses (especially in the tourism sector) and households. These strategies were concentrated in different sectors. In the business sector, new legislation was introduced to alleviate the impact that lockdowns caused to businesses. For example, law no. 122/2020 exempted small businesses from profit tax. More specifically, the tax rate applicable for taxpayers under the small business profit tax for businesses with an annual turnover from ALL 0 (zero) to ALL 8 (eight) million, is 0 (zero). Additionally, law no. 106/2020 on income tax, introduced a change in the profit tax threshold (i) 0% for taxpayers with an income of up to ALL 14,000,000 per year; and (ii)15% for taxpayers with an income over ALL 14,000,000 per year. Additionally, the deadline for the payment of local taxes and fees was postponed from April to September 2020. Other municipalities implemented fiscal relief measures. For example the municipality of Shkoder introduced a measure to exempt local SMEs, microenterprises, self-employed and NGOs from local fees for a period of three months and exempted socially vulnerable categories for six months. The Municipality of Roskovec, with the support of the EU and UNDP, launched a program for sustainable agricultural development to provide small farmers with seeds, fertilizers, and other agricultural support.

In the tourism sector, the Municipality of Tirana, and other municipalities in the region introduced active measures to promote local tourism with a special focus to the Albanian diaspora in the world; the initiative “Come to your home” was a cooperation with the Union of Albanian Municipalities in the Region. Other measures include fiscal relief. For example, the Municipality of Tirana adopted various tax exemptions and deferred the payment of local taxes and fees from April to August 2020.Tirana eliminated the hotel accommodation tax to incentivize the sector.

In the social sector, the Municipality of Tirana put in place the “Adopt a Grandmother” initiative that consisted of young people volunteering to support lonely elderly neighbours by sharing home-cooked meals or providing them with food and medical supplies. Similarly, the Municipality of Shkodër aided the elderly via cash in their monthly pensions. Additionally, a Municipal Civil Emergency Committee chaired by the Mayor, was set up in the municipality of Roskovec to cope with the COVID-19 emergency situation. The committee was integrated by key directors of the key municipal departments, representatives of the local structures of the State Police, the Ministry of Health, and the Albanian Post.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: Subnational government revenue increased by 12.1% between 2019 and 2020. This was mostly driven by the increase of transfers from the central government to support subnational governments during the crisis (20%), which compensated for the decline in tax revenue (-4.5%) and tariffs and fees (-7.5%). The municipality of Lezhë recorded the most significant decline in own-source revenue, followed by the municipalities of Kamza and Durrës. Regarding subnational government expenditure, it increased by around 17% in 2020 compared to 2019, mainly due to the spike in social expenditure (42%). Subnational investment decreased by 6% over the period. As a result, subnational government debt was almost stable (slight increase of 1% between 2019 and 2020).

ECONOMIC AND SOCIAL STIMULUS PLANS: As a part of the support packages, the European Union will provide Albania with EUR 90 million to fight COVID-19. From the total amount, 8% will be allocated to the health sector, and the remaining 92% to support the social and economic recovery.

The priority areas of recovery in Albania include the digital transformation and innovation for enhanced productivity to encourage the use of technology for the micro and small enterprises especially in agriculture and the cultural and creative sector. Other areas involve decent work, support to municipalities to deliver social protection services in COVID-19 and similar public health crisis as well as supporting access to education and learning opportunities for children. Economic strategies for recovery include protecting jobs and the introduction of new lines of credit for SMEs. Food and supply chains are also part of the recovery measures, since disruptions have been identified as problematic in the food system especially in rural areas.