Via IMF (Den Internationale Valutafond)

Albania: Staff Concluding Statement of the First Post-Program Monitoring Mission







September 28, 2020







A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff virtual visit (or ‘mission’). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.









Washington, DC:
An International Monetary Fund (IMF) mission, led by Ms. Yan Sun, conducted
a virtual visit during September 17-28, 2020 for the first

Post-Program Monitoring

(PPM) discussions. PPM is a regular surveillance tool for countries with
IMF credit outstanding above 200 percent of quota. PPM missions focus on
vulnerabilities and risks to the repayment capacity to the IMF. At the end
of the visit, the mission issued the following statement:

Main highlights


The November 2019 earthquake and the COVID-19 pandemic have taken a big
toll on the lives of Albanian people and the economy. Thanks to adept
policy management and globally accommodative financial conditions,
macroeconomic and financial stability have been maintained

.

Albania’s capacity to repay the Fund is broadly adequate, but risks
have risen in light of the shocks. Aside from a more severe global
pandemic, key risks stem from elevated public deficits and debt,
weaknesses in public finances, and a relatively high level of
non-performing loans (NPLs). Managing these risks amid large
uncertainty will require continued support for the economy, gradually
rebuilding room for policy maneuver as the recovery becomes entrenched,
and close supervision of the financial sector.


  • Support for people and firms hurt by the shocks is warranted, but
    should be temporary and well-targeted, subject to transparency and
    accountability. There is a need to make room for supporting
    essential activities and protecting the most vulnerable, including
    by containing non-priority spending and improving spending
    efficiency.

  • As the effects of the shocks subside and to recreate room for
    fiscal policy maneuver, it will be critical to resume some modest
    fiscal consolidation from 2021 and build on it substantially over
    time, underpinned by a sound Medium-Term Revenue Strategy.

  • The authorities should redouble their efforts to raise tax revenue
    by building a fairer, simpler, more efficient, and more transparent
    tax system that is growth conducive. Higher revenue is critical to
    sustain the higher spending needs of the people and the economy. At
    the same time, there is a need to contain and manage increasing
    fiscal risks and strengthen the management of public resources,
    notably of public investment, so as to obtain more value for money.

  • Strong efforts are warranted to safeguard financial stability while
    supporting borrowers hit by the shocks.

  • There is a need to prepare contingency measures in case of a more
    severe pandemic.



Public finances—balance supporting the economy and addressing
development gaps with the need to rebuild room for fiscal policy
maneuver and reduce debt

A sizeable increase of the 2020 fiscal deficit to cushion the impact of
the shocks is warranted.

Reflecting its dependence on tourism and remittances, the economy is
projected to contract by about 7½ in 2020. The fiscal deficit is projected
to rise to about 7 percent of GDP and the public debt to slightly above 80
percent of GDP at end-2020. International financial support, including from
the IMF, and the June Eurobond issuance will help cover the financing
needs. We expect the economy to recover from the second half of 2020 and
strengthen gradually over 2021 as the impact from the shocks subsides and
earthquake reconstruction continues. Inflation is projected to remain low
and we support the Bank of Albania’s accommodative policy stance and
flexible exchange rate policy.

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Support for the economy needs to continue in 2021 but with growth
recovering, the budget should also strive to achieve a modest decline
in the debt ratio.

Further progress in rebuilding room for fiscal policy maneuver by reducing
the fiscal deficit needs to be embedded in a credible medium-term budget
framework. During 2021, the authorities should contain non-priority
spending to make room for adequate health care provision for the pandemic
and social protection for the most vulnerable, and maintain sizable
liquidity for contingency, as the risks to activity are mainly to the
downside. Continued earthquake reconstruction must be based on a robust
institutional framework with transparency and accountability. We welcome
the recent amendment to the fiscal rule stipulating a primary balance of at
least zero from 2023 onward and note that this requirement should be seen
as a floor rather than a target.


Fiscal support should be temporary and well-targeted, subject to
transparency, accountability, and adequate public financial management
(PFM) controls.

PFM short-cuts necessary during the emergency should be regularized as soon
as possible and earthquake reconstruction funds be subject to adequate PFM
controls, including planning through the budget process. It is important to
ensure proper procurement, adequate monitoring and timely reporting,
adequate oversight, and independent ex-post audits. The ongoing efforts to
strengthen the Anti-Money Laundering/Combating the Financing of Terrorism
(AML/CFT) framework need to continue. We reiterate our advice against a
possible tax amnesty, given concerns about its impact on tax compliance as
well as money laundering and governance risks.

We stress the importance to complete, adopt, and start implementing a
sound Medium-Term Revenue Strategy (MTRS) in 2021, following proper
public consultation.

Higher tax revenue is essential to support much needed investment in
physical and human capital while reducing fiscal deficits and the high
public debt ratio. Albania’s tax system is complex and fragmented, and
frequent ad hoc changes have undermined its stability and transparency. A
fairer, simpler, more efficient, and more transparent tax system can boost
revenue mobilization while also improving the investment climate and
reducing informality. The ongoing preparation of a MTRS
offers a welcome opportunity to comprehensively review and redesign the tax
system and should proceed without further delays.

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There

is an urgent need to strengthen public investment management and the
quality of spending.

Projects should be taken from a pipeline that has gone through a rigorous
preparation, assessment, and prioritization process and will contribute
sufficiently to an inclusive recovery. We reiterate our call to establish a
unified process for preparing, prioritizing, and evaluating all public
investment projects, including Public-Private Partnerships (PPPs). The use
of unsolicited PPPs should continue to be prevented.


Fiscal risks are increasing and need to be carefully monitored and
managed.

Strong efforts are needed to rigorously assess and manage not only the
direct budgetary impact but also contingent liabilities stemming from PPPs.
The PPP law rightly strengthened the gatekeeping role of the Ministry of
Finance and Economy (MOFE), which needs to build the capacity to perform
this important task. The MOFE also needs to closely monitor and explicitly
report and budget for the two recent government guarantee schemes.
Furthermore, efforts must continue to improve the performance of the
state-owned electricity sector and other SOEs. We remain concerned that the
Albania Investment Corporation (AIC), once operational, will bring new
fiscal risks.


The authorities should avoid creating new spending and VAT refunds
arrears and stick to the plan to clear the existing stock.

These arrears not only undermine the business climate and trust in the
government, but also hurt businesses’ cash flows at a time when they are
already stressed by the shocks. We welcome progress made so far to clear
VAT refunds arrears. A permanent solution to the VAT arrears problem calls
for realistic revenue forecasts, disentangling VAT repayments from
collection, and strengthening budgetary controls. Given the elevated debt
level and high gross financing needs, efforts should be stepped up to
strengthen cash and debt management.



Financial sector—safeguard financial stability while supporting
borrowers hit by the shocks


The banking system has so far remained stable and liquid, but it has
pockets of vulnerabilities and its resilience will be tested by the
shocks

. In particular, relatively high levels of NPLs are likely to rise due to
the impact of the pandemic on borrowers. Given that the shocks are
exceptionally large and their full impact may only be visible on banks’
balance sheets after some time, the buildup of vulnerabilities in banks may
not be detected soon enough unless they are monitored and managed very
carefully by the Bank of Albania.

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A near-term priority for the Bank of Albania is to closely monitor and
guide banks’ restructuring of credit portfolios.

We support prudent bank loan restructuring where necessary to support
borrowers hit by the shocks. There is a need to ensure consistency and
prudence of restructuring practices across the banks.
The Bank of Albania’s decision to temporarily relax loan classification
and provisioning rules may delay the timing when the impact of the
shocks on banks’ asset quality and capital position can be accurately
assessed.
We stress the importance of maintaining loan classification and
provisioning rules to appraise banks’ potential losses as accurately as
possible.


We support the decision to restrict dividend distributions until
end-2020 and recommend that it be retained until the full impact of the
pandemic is known and banks’ capital position is assessed, under both
the local regulations and IFRS-9 standards, to be sufficient to absorb
the losses from the shocks.

In line with risk-based supervision, the Bank of Albania should closely
monitor the capital position of vulnerable banks. Where shortfalls
arise, a credible capital restoration plan should be adopted, while
capital could be allowed to temporarily fall below prudential limits.


The authorities should prepare for a likely surge in NPLs and continue
to improve the resolution framework.

Efforts should be stepped up to (i) swiftly and credibly operationalize and
enforce the insolvency and resolution framework; (ii) implement the
regulatory framework for out-of-court restructuring of loans; and (iii)
make progress in bailiff reform. Improvements in the judicial process would
also be important.


Continued efforts are needed to align Albania’s regulatory framework
with international standards.

The implementation process should continue, though a sufficiently long
phase-in period may be provided to banks so as to avoid procyclicality and
disruptions during the pandemic.
We recommend close monitoring of risks from related-party lending,
cross-border lending, and large exposures.



Risk of a more severe global pandemic—stand ready to adjust and
preserve stability


The unprecedented uncertainty of the pandemic highlights the importance
of contingency planning.

In case of a more severe pandemic, the authorities will need to target new
measures to ensure adequate health care provision and protect those most in
need, identify options for budget reallocations and additional financing,
and keep the domestic financial market liquid. They should stand ready to
take these and any further measures that may be warranted, while preserving
macroeconomic and financial stability.


Finally, we would like to thank the authorities and all our other
counterparts for the excellent collaboration and productive
discussions.


IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Gediminas Vilkas

Phone: +1 202 623-7100Email: MEDIA@IMF.org

@IMFSpokesperson