Mission Concluding Statement 

Albania: IMF Discussion with Government on 2009 Budget in an Unsettled Global Financial Environment

September 23, 2008

This statement presents the conclusions of an IMF mission that visited Albania September 17–23, 2008 to discuss with the authorities 2008 budget execution, the 2009 budget, monetary and financial sector policy, and progress in structural reforms, notably the privatization of the electricity distribution company.

Macroeconomic trends remain favorable, with buoyant growth of some 6 percent projected for this year and next, and inflation well within the Bank of Albania’s (BoA) target range. Meanwhile, international studies have recently highlighted the improved business climate. However, these achievements are taking place against the backdrop of unsettled global financial markets. With Albania increasingly a partner in the global economy, this calls for prudent economic and financial policies going forward, all the more so in an election year.

Turning to the 2008 budget, despite improvements in implementation rates, capital spending still falls short of budget plans and at current trends the 2008 deficit would come in below the targeted 5.2 percent of GDP. While the tighter fiscal stance has supported the BoA’s efforts to ensure price stability, and limited the current account deficit from expanding even further, it also risks under funding priority sectors. Accordingly, the mission calls on the authorities to expeditiously review actual spending to ensure sufficient attention to investment priority areas, if needed through another supplementary budget.

To further macroeconomic stability, especially in the current unsettled global financial environment, it is imperative to avoid fiscal stimulus in 2009. At the current juncture, we recommend limiting the 2009 deficit to some 3–3½ percent of GDP. Further into the future, and after the IMF program expires, the authorities are encouraged to commit to a clear fiscal rule to anchor policy and underpin the envisaged access to international capital markets.

We endorse the recent approval by the BoA of additional banking supervision regulations, in particular on increased provisioning for foreign currency lending, which should help rein in credit growth and current account deficits. Looking ahead, we encourage the BoA to undertake even more high-frequency monitoring of banking system transactions, including foreign currency exposure. The BoA should also continue its efforts at establishing memoranda of understanding with home country bank supervisors. As in the past, the BoA should stand ready to counter any deterioration of inflation expectations, including through interest rate hikes.

Formalizing the informal economy in Albania is an important goal. However, this should not rely on administratively burdensome regulations that only add new room for discretion and corruption. Instead, measures that encourage self compliance are called for. In this context, we advise against reducing the social security contribution rates. The fiscal space should rather be reserved for financing a pension reform that could improve the link between contributions and benefits and thus provide important incentives for self enforcement.

Large uncertainties remain in the national accounts data and we urge INSTAT to continue to make good use of the available external technical assistance in this area.

The mission welcomes the launch of the privatization process for the electricity distribution company. Irrespective of that process, it will be important to maintain the momentum and continue to improve the collection and loss performance; despite recent progress, collection rates are still below targets, in part reflecting nonpayment by public institutions. To limit new losses of KESH—and in line with the current PRGF/EFF supported program—it is essential that the existing limit on electricity imports be respected.

An IMF review mission will visit Tirana in early November. Provided understandings on policies, including the 2009 budget, are reached, it is expected that the sixth and final review under the program will be presented to the IMF’s Executive Board in January 2009.

The mission would like to thank the authorities for their continued close cooperation and warm hospitality.