Via IMF (Den Internationale Valutafond)

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

May 6, 2019

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. 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.

Albania’s medium-term economic outlook is broadly favorable, even
though growth is expected to moderate in 2019. Maintaining the growth
momentum over the medium term requires reforms to improve the business
climate and reduce vulnerabilities. Key risks stem from high public
debt, weaknesses in public finances and bottlenecks to financial
intermediation. Policy priorities include further fiscal consolidation
through well-designed tax policies, better public investment
management, and prudent actions to support credit for private sector

An International Monetary Fund (IMF) mission, led by Mr. Jan Kees Martijn,
visited Tirana during April 25-May 6, 2019, for the second

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:

Risks to Albania’s capacity to repay seem limited.

Although gross financing needs are fairly high due to the relatively short
maturity of public debt, debt service, including to the IMF, is expected to
remain well within Albania’s capacity to repay. IMF credit outstanding
stood at 2.8 percent of GDP at end-2018. Albania’s strong payment record
and macroeconomic stability also suggests that repayment risks are

The economic outlook is broadly favorable.
Growth is expected to moderate in 2019 but remain close to 4 percent over
the medium-term. This year, growth is projected to slow to 3.5 percent,
owing to the base effect of record electricity production in 2018 and the
slowdown in partner countries. In the medium-term, 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. However, sustained
development also hinges on improvements in economic governance, including
in the rule of law and the fight against corruption. As inflation remains
well below its 3 percent target, the monetary policy stance should continue
to be very accommodative. Inflation is expected to converge slowly towards
its target, as the output gap narrows and inflation in the euro area

However, there are important downside risks.
Albania is significantly exposed to the increasing risks to growth in the
EU, notably in its main trading partners. On the domestic front the
vulnerabilities are mainly in the public sector. While the fiscal deficit
declined in 2018, it is projected to widen to 2.5 percent of GDP in 2019
(including guarantees for new loans to the energy sector of 0.4 percent of
GDP). This widening is driven in part by the planned repayment of
government arrears which, by itself, is welcome. However, the deficit is
also augmented by recent tax measures that erode the already narrow tax
base, and introduce preferential treatment of additional sectors, including
through reduced VAT and corporate tax rates. Moreover, there are risks of
further revenue shortfalls, and expected losses in the energy sector due to
lower hydropower production. Despite a decline in recent years, public debt
continues to be high at 69.9 percent of GDP (including arrears) at
end-2018, and it is projected to decline to 66.3 percent of GDP by the end
of this year. At the current level of public debt and the deficit, fiscal
policy has little room for absorbing or offsetting adverse shocks.
Furthermore, there are fiscal risks from the increasing contingent
liabilities, such as those related to public-private partnerships (PPPs).

Building on recent reforms to strengthen risk management and tax
administration we recommend containing fiscal risks and creating
fiscal buffers that require further fiscal consolidation via
sustainable revenue efforts and stronger budgetary institutions.

  • We urge the authorities to use the favorable economic environment
    to improve the fiscal position by strengthening the revenue base.

    Specifically, a front-loaded fiscal adjustment to bring the primary
    surplus to 1.5 percent of GDP by 2021 should help build fiscal buffers,
    and ensure faster convergence of debt towards the 45 percent objective
    stipulated by the organic budget law. This adjustment should be
    achieved through higher revenues because Albania’s large infrastructure
    and human development needs argue against expenditure cuts. We
    recommend strengthening the tax system by reversing measures that
    fragment and weaken the tax base and by levelling the playing field for
    businesses. In this context, we welcome the authorities’ intention to
    develop a medium-term revenue strategy covering both tax policy and
    administration. This approach should help to build consensus on revenue
    goals and on a comprehensive package of tax measures for achieving

  • Urgent action is needed to curtail the persistent public sector

    These arrears undermine the business climate and trust in the
    government. We urge the authorities to ensure the full and timely
    payment of all validated new VAT refund requests from now on,
    disconnecting them from corresponding revenue flows. And we welcome the
    authorities’ plans to repay the outstanding stock of VAT refund arrears
    as soon as feasible (and for the most part within 2019). It is also
    important to take swift measures to strengthen commitment controls for
    investment projects to put an end to government payment arrears, in
    particular by the road fund.


  • Debt management should be improved including by resuming the
    issuance of short-term (three-months and six months) T-bills.

    This would be in line with the debt issuance strategy prepared in
    collaboration with the World Bank. While the authorities have made
    valuable progress in lengthening the maturity of public debt, this
    should not halt the issuance of short-term instruments. These
    instruments are necessary for cost-efficient cashflow management by the
    treasury as well as commercial banks, for the development of secondary
    and hedging markets—which utilize the pricing at different segments of
    the yield curve—and for facilitating BOA liquidity management.
    Furthermore, while the increased reliance on Eurobond issuances may
    seem beneficial in favorable times, building a robust and liquid
    domestic debt market should be a priority as it helps mobilize domestic
    savings and reduces currency and rollover risks. In this context, it is
    critical to strengthen the MOFE’s debt management capacity and to
    ensure good coordination with the BOA.

  • We urge the authorities to make use of the recent amendments to the
    PPP law to limit the risks from PPP-related contingent liabilities
    and to ensure more consistent public investment management.

    This is important to protect the public finances and to help ensure
    value for money. We welcome the amendments that aim to improve risk
    management of PPPs. As the MOFE embarks on its new role as gatekeeper
    for PPPs, it will be essential to make sure it has the capacity to
    assess the risks and costs of these projects, particularly in the
    pre-feasibility stage. In this context, the Ministry should have access
    to all contractual information from line-ministries (including for
    existing projects). Moreover, reversing the fragmentation of decision
    making in public investment management would greatly enhance
    cost-effectiveness. We also continue urging the authorities to abolish
    the use of unsolicited proposals for all PPPs.

  • We strongly advise the authorities to revisit recent proposals for
    establishing the Albania Investment Corporation (AIC), to help
    avoid risks to the budget and to the integrity of the public
    investment management framework.

    The draft law would allow the government to direct individual
    investment decisions, which could make the AIC an off-budget spending
    tool that risks eroding fiscal discipline and circumventing public
    investment management processes. Instead, the framework should ensure
    that the AIC will operate on a commercial basis and at arm’s length of
    government. The law should affirm the independence of the AIC in
    operational decisions and in selecting individual investment projects.
    The AIC should also be subject to the Public Procurement Law.

  • Containing fiscal risks requires improving the performance of the
    energy sector,

    which is financially weak and struggling with endemic arrears. The
    dependence of the sector on rainfall exacerbates its financial
    vulnerability and creates risks for the government budget (including
    this year). We encourage authorities to implement the restructuring
    plan for the sector prepared with World Bank advice to put the sector
    on a sustainable financial footing.

Further measures are also in order to contain the risks from the
financial sector

The banking sector is finishing a consolidation process and is
well-capitalized and liquid.

We welcome the ongoing measures by the BOA to strengthen the regulatory and
supervisory framework and implement Basel standards amidst the changes in
bank ownership, and to continue cleaning up bank balance sheets with a
reduction in NPLs.

However, structural weaknesses in credit environment undercut the
business climate (especially for SMEs) and hinder the

 transmission of monetary policy.
Unlocking credit growth would require an ultimate resolution to the
stalemate with bailiffs, full implementation of the insolvency and
resolution framework, and government measures to support further


The BOA has been very active in strengthening its supervisory and
macroprudential tools.

Regarding the latter, the BOA has aligned its regulations more closely with
international standards, including on capital buffers and the development
of a wide range of macroprudential indicators. The bank has also put in
place more intensive inspection and supervision, both on-site and off-site,
for banks with new shareholders. However, other banks, including
systemically important ones, are inspected on-site only once every two
years. We advise the BOA to increase the frequency of inspections to once
every year to enhance its ability to identify risks stemming from large
exposures and related-party lending in a more timely manner.

We also urge the authorities to continue reforms to address weaknesses
in the AML/CFT framework

, by implementing the action plans to address the deficiencies identified
in the Moneyval evaluation report without delay.

Finally, I want to thank the authorities and all our other counterparts
for the excellent collaboration and for their hospitality.

IMF Communications Department

PRESS OFFICER: Gediminas Vilkas

Phone: +1 202 623-7100Email:

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