IMF Executive Board Concludes 2017 Article IV Consultation with Albania
December 14, 2017
On December 4th, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the 2017 Article IV Consultation with Albania. 1
Albania’s economy grew by 3.4 percent in 2016 and continues to strengthen, benefitting from rising domestic demand, large energy-related foreign direct investment (FDI), and a recovery in key EU trading partners. The declining output gap and pass-through of higher external inflation have pushed up inflation to just under 2 percent. Overall credit growth remains stagnant as banks continue to clean up their balance sheets. Short-term external vulnerabilities are limited, as the current account deficit is predominantly funded by concessional borrowing and large FDI inflows, while official foreign reserves are ample.
Fiscal and financial vulnerabilities have been lowered over the past four years. However, challenges remain from the high level of public debt and financing needs, non-performing loans, and pervasive institutional weaknesses that hinder investment. The new government’s clear mandate following election victory in June, the favorable economic outlook, and the prospects for opening EU accession negotiations provide a window of opportunity to resume implementing the reform agenda. The main policy objectives at the current juncture are to maintain macroeconomic and financial stability, and to deepen structural and institutional reforms to accelerate the pace of convergence.
The medium-term outlook remains favorable. GDP growth is projected to accelerate to around 4 percent, driven by continued strong domestic demand, reforms that improve the business climate, and a strengthening EU recovery. Inflation is expected to edge up toward the 3 percent target as the output gap closes. The current account deficit is expected to narrow, as import-intensive energy projects wind down, the Euro Area continues to recover, and higher non-energy FDI propels export diversification. Risks to the outlook are balanced. On the upside, accelerated donor support as part of the EU accession process could lead to higher investment and a stronger credit recovery. On the downside, volatile domestic politics or shocks to global growth could pose risks to reform implementation and fiscal consolidation.
Executive Board Assessment 2
The Executive Directors emphasized that the growing economy and the new government’s clear electoral mandate provide a good opportunity to continue reform efforts to increase Albania’s growth potential, enhance the resilience and competitiveness of the economy, and strengthen the financial system while maintaining fiscal discipline.
Directors supported the need to reduce public debt to build fiscal space and ensure debt sustainability. They recommended that the authorities consider a more ambitious and front‑loaded consolidation path. They also emphasized that strengthening fiscal institutions remains key for mitigating fiscal risks and enhancing efficiency. They noted that public debt management should focus on lengthening the maturity of public debt and diversifying the investor base.
Directors underscored the need for higher revenues while refraining from lowering tax rates or granting any new exemptions or preferential tax policies. They supported the tax administration’s efforts to improve compliance and welcomed the plan to introduce a value‑based property tax.
Directors agreed that it is critical to strengthen public investment management, given the planned scaling‑up of investment spending. They urged the authorities to ensure proper implementation of the framework for public‑private partnerships in line with international best practices. They also emphasized the need to minimize the recurrence of arrears, including by improving the VAT refund process.
Directors noted that after impressive early gains, reforms in the state‑owned electricity sector have been delayed and need to resume. They recommended improving operational efficiency, speeding up financial restructuring, and advancing institutional and market design reforms in the sector.
Directors agreed that the Bank of Albania’s accommodative monetary policy stance remains appropriate, and any unwinding of monetary easing should await evidence of a sustained rise in inflation. Directors supported the authorities’ de‑euroization strategy and stressed the importance of aligning the central bank law with modern central banking legislation.
Directors supported the authorities’ continued efforts to strengthen financial supervision with a focus on the fastest‑growing and systemically important banks. They highlighted the need for continued vigilance and improved crisis preparedness, particularly in light of the increased interconnectedness in the sector. To mitigate risks to banking stability, candidates for new banking licenses should possess adequate banking experience and avoid conflicts of interest. They commended the progress in restructuring the NPLs of large borrowers, including by revising bailiff regulation, implementing the new Bankruptcy Law, and facilitating out‑of‑court debt restructuring.
Directors agreed that addressing structural impediments to competitiveness remains key for achieving faster growth. They welcomed the progress achieved in structural reform implementation, and stressed the need to further advance institutional reforms in areas such as the judiciary, property rights, and anti‑corruption. Directors recommended investing further in vocational training to encourage labor participation, especially among women and youth.
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Albania: Basic Indicators and Macroeconomic Framework, 2013–17
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1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
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