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IMF Executive Board Concludes 2019 Second Post-Program Monitoring for Albania







July 3, 2019















On July 1, 2019, the Executive Board of the International Monetary Fund
(IMF) concluded the Second Post-Program Monitoring review for Albania and
considered and endorsed the Staff Appraisal on a lapse-of-time basis.

1

Albania’s capacity to repay the Fund is adequate reflecting a strong record
of repaying the Fund, relative macroeconomic stability, and progress in
reforms.

Albania’s medium-term economic outlook is broadly favorable. In 2019, growth is expected to slow down to 3.5 percent,
due to the base effect of the 2018 peak in power generation and the
economic slowdown in Albania’s main partner countries. Over the
medium-term, GDP growth is projected to converge to its 4 percent potential
rate, as activity is expected to be driven by a pickup in EU growth,
increasing labor market participation, a gradual strengthening of exports
including tourism, and the investments needed to close Albania’s large
infrastructure gap. Inflation is expected to converge slowly towards its 3
percent target by 2021, as the output gap narrows and imported inflation
from the euro area recovers. The current account deficit is projected to
narrow further over the medium term, supported by strong export growth and
planned fiscal consolidation. The level of FX reserves remains comfortable.

Despite the favorable environment and positive short-term outlook, risks
and vulnerabilities remain. Albania is exposed to the increasing risks to
growth in the EU, notably in its main trading partners. On the domestic
front, the vulnerabilities are primarily in the public sector, arising from
high public debt, increasing contingent liabilities, and weaknesses in
public institutions and economic governance in general. Domestic growth
vulnerabilities include demographic prospects and heavy dependence of
growth on weather conditions.

Executive Board Assessment

Following strong growth last year, the baseline projections foresee an
ongoing economic expansion. Furthermore, inflation remains well under
control, and the current account is expected to improve further. However,
more ambitious improvements in governance and anti-corruption efforts,
skills formation and other aspects of the business environment will be
needed to raise potential growth, and take advantage of the country’s
favorable location and low labor costs.

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As a small open economy, with limited economic diversification, Albania
remains considerably exposed to external and domestic risks. The country is
especially vulnerable to drought, population aging combined with the
ongoing emigration of skilled workers, and spillovers from lower growth in
key trading partners. Furthermore, as a result of still high public debt,
relatively large financing needs, and rising contingent liabilities, severe
adverse shocks to growth or a deterioration in regional financial
conditions could quickly undermine Albania’s public balance sheet and
impair its access to affordable financing.

At the same time, Albania’s flexible exchange rate and ample reserves offer
important tools for absorbing shocks. Furthermore, the recent fiscal
consolidation and the lengthening of the maturity of public debt have also
been helpful. As a result, risks to Albania’s capacity to repay appear
contained. Nonetheless, more is needed to limit risks related to the public
finances.

It is critical to implement further fiscal adjustment, combined with
improvements in the quality of budgetary policies. Accelerating the
reduction in public debt over the medium term, will create space to absorb
and offset adverse shocks through countercyclical fiscal policies. Given
the need to improve Albania’s infrastructure and human development, fiscal
consolidation should be underpinned by improvements in tax policy and tax
administration that lead to higher revenues. Such reforms should be
supported by a careful analysis of the revenue system and a medium-term
strategy to enlarge the tax base and level the playing field for
businesses.

The authorities’ ambition to address the buildup of fiscal arrears is most
welcome. These arrears have undercut the business climate as well as trust
in the government. Going forward, all validated new VAT refund requests
should be honored without delay, and the existing arrears should be cleared
as soon as feasible—even if, in the short term, this may raise the deficit
(measured on a cash basis).

It will be important to put in place a more consistent framework for public
investment management, and to limit the risks from PPPs and other
contingent liabilities. The Ministry of Finance and Economy should exploit
its new role as gatekeeper for new PPP projects to help ensure both value
for money and the containment of risks. Furthermore, the proposed
establishment of the AIC should be revisited, to make sure that–if such
institution is created–it will act on a strictly commercial basis and
without direct government interference or reliance on future budget
support.

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The energy sector needs to be put on a sound footing without delay. Given
sector’s endemic financial weakness and accumulating arrears, financial
restructuring should be undertaken without delay, combined with continued
actions to liberalize the sector and unbundle its key players.

Debt management should reconcile the search for lower financing costs and
longer maturities, with the need to support the development of a robust and
liquid domestic debt market. The latter would help mobilize domestic
savings and reduce currency and rollover risks. In this context, it will be
important to resume the issuance of short-term T-bills.

Continued strong supervision will be important to ensure that the expected
increase in bank lending does not weaken financial stability. The banking
sector has experienced a large-scale consolidation, combined with a shift
in ownership away from EU banks. Against this background, the BOA’s recent
measures for further alignment with EU standards and the increased
frequency of on-site inspections should be helpful, particularly to contain
risks from large exposures and related-party lending. Further actions will
be needed to address weaknesses in the AML/CFT framework.


Albania: Selected Economic Indicators, 2015­­–2020

2015

2016

2017

2018

2019

2020

Proj.

Real sector

Real GDP

2.2

3.3

3.8

4.1

3.5

4.0

Domestic demand contribution

0.6

3.2

3.6

5.0

4.0

4.3

Consumption

0.6

2.0

2.1

2.1

2.5

2.7

Investment (Incl. inventories and stat. disc)

0.0

1.1

1.5

2.9

1.5

1.6

External demand contribution

1.6

0.2

0.2

-1.0

-0.5

-0.3

Consumer Price Index (eop)

2.0

2.2

1.8

1.8

2.2

2.6

Consumer Price Index (avg.)

1.9

1.3

2.0

2.0

2.0

2.4

GDP deflator

0.6

-0.6

1.5

0.7

2.0

2.4

Saving-investment balance

Foreign savings

8.6

7.6

7.5

6.8

6.6

6.4

National savings

15.8

16.8

17.0

17.3

17.6

17.8

Public

0.7

1.2

2.4

2.7

1.5

1.9

Private

15.1

15.6

14.7

14.6

16.1

15.8

Investment (incl. Inventories and stat. disc.)

24.4

24.4

24.5

24.2

24.2

24.2

Public

5.3

5.1

5.5

5.6

5.5

5.7

Private

19.2

19.3

19.0

18.6

18.6

18.5

Fiscal sector

Total Revenues and grants

26.3

27.4

27.7

27.6

27.2

27.4

Tax revenue

23.7

24.9

25.7

25.8

25.0

25.2

Total Expenditure

30.9

29.6

29.7

29.3

29.7

27.3

Primary

28.2

27.2

27.7

27.0

27.7

27.3

Interest

2.7

2.5

2.1

2.2

2.0

2.1

Overall balance 2/

-4.6

-2.3

-2.0

-1.6

-2.5

-2.0

Primary balance

-1.9

0.2

0.1

0.6

-0.5

0.0

Financing

4.6

2.3

2.0

1.6

2.5

2.0

of which
: Domestic

-1.3

0.9

-0.8

-1.3

1.2

0.2

of which
: Foreign

5.0

1.3

1.9

2.9

1.3

1.8

General Government Debt 1/

73.7

73.3

71.9

69.9

66.3

64.5

Domestic

39.5

39.1

39.0

37.6

34.2

32.8

External

34.2

34.3

32.9

32.4

32.0

31.7

Monetary indicators

Broad money growth

1.8

3.9

0.3

-0.2

6.4

6.5

Private credit growth

-2.8

0.4

-0.8

-0.9

5.0

5.7

Velocity (nominal GDP/broad money)

1.2

1.2

1.2

1.3

1.3

1.3

External sector

Trade balance (goods and services)

-17.3

-16.9

-15.1

-14.0

-13.6

-12.8

Current account balance

-8.6

-7.6

-7.5

-6.8

-6.6

-6.4

Gross international reserves (billions of Euros)

2.9

2.9

3.0

3.4

3.7

3.9

(In months of imports of goods and services)

7.0

6.5

6.2

6.6

6.8

6.8

(Relative to external debt service)

2.6

3.6

3.5

3.1

3.8

3.1

(In percent of broad money)

32.5

31.5

31.4

33.2

34.0

33.8

Memorandum items

Output Gap (percent)

-1.8

-1.4

-0.7

-0.7

-0.5

-0.2

Sources: Albanian authorities; and IMF staff estimates and
projections.

1/ The stock of general government debt includes arrears
from central and local government.

2/ The fiscal balance includes guarantees for new loans to
the energy sector.

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1

The Executive Board takes decisions under its lapse-of-time procedure when
the Board agrees that a proposal can be considered without convening formal
discussions.


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