Albania and the IMF

Country's Policy Intentions Documents

See also:
Poverty Reduction Strategy Papers (PRSPs)



Albania
Enhanced Structural Adjustment Facility
Policy Framework Paper for 1999–2001

Prepared by the Albanian authorities in collaboration
with the staffs of the International Monetary Fund and the World Bank
May 28, 1999

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Contents

  1. Introduction

  2. Recent Performance Under the Adjustment Strategy

  3. Objectives, Strategies, and Policies for 1999 and the Medium Term
    1. Fiscal Policy
    2. Monetary and Exchange Rate Policy
    3. External Sector Policies
    4. Sectoral and Structural Policies
    5. Improving Statistics

  4. External Financing Requirements

  5. External Debt Management

  6. Technical Assistance Requirements

Tables 1-4 PDF, 159k (Use the free Adobe Acrobat Reader to view pdf files)

Table 1.Policy Framework Paper Matrix
Table 2.Basic Indicators and Macroeconomic Framework, 1993–2002
Table 3.Financing Requirements, 1994–2003
Table 4.Social Indicators


I.  Introduction

1.   Albania has made a determined, and so far successful, effort to put the severe economic and social disturbances of 1997 squarely behind it. Output has recovered to pre-crisis levels, inflation has been brought down to single figures, and the structural reform program has continued. Progress is threatened by the massive influx of refugees from the crisis in Kosovo, which are imposing considerable strains on the Albanian economy. While the government remains firmly committed to its medium-term development and reform objectives consistent with the ESAF arrangement, it will need additional external financing to deal with the budgetary and balance of payments impact of the crisis.

2.   Albania still has a long way to go to establish a healthy market economy and tackle widespread poverty: even after rapid growth in the early years of transition (1992–96) Albania's average standard of living remained one of the lowest in Europe. To enhance conditions for growth, the government intends to continue pursuing the strategy outlined in its 1998 Policy Framework Paper (PFP), updated here with the help of the staffs of the IMF and World Bank (Table 1). To support its program, the government is requesting a second-year arrangement under the IMF's Enhanced Structural Adjustment Facility (ESAF), a Structural Adjustment Credit (SAC) and other adjustment and investment lending from the World Bank, and further financial and technical support from bilateral and multilateral creditors and donors. The government is also requesting budgetary grants from the European Union and other bilateral donors to help it deal with the burden of the refugees.

Contents

II.  Recent Performance Under the Adjustment Strategy

3.   Macroeconomic stability was restored in 1998. The government adhered to its tight fiscal target, reducing the domestically financed component of the deficit to 6  percent of GDP in 1998 from 10.8 percent of GDP in 1997 through a combination of revenue enhancing measures and control over the growth of primary expenditures. The domestic fiscal effort supported the goals of monetary policy and inflation declined to 8.7 percent in the year to December 1998, having peaked at 42 percent during 1997. Confidence in policies was underlined by an increase in private transfers from abroad and a recovery in the lek, which had fallen by some 40 percent against the dollar during the crisis. In the first few months of 1999, inflation has fallen further to around 2 percent and the lek has remained broadly stable even after the crisis in Kosovo.

4.    The restoration of law and order and of macroeconomic stability in 1998 underpinned a strong revival of growth, estimated at 8 percent, close to the target. As the associated recovery in imports was less than expected, while inflows of private remittances recovered strongly, the current account deficit fell to about 6 percent of GDP from 12 percent of GDP in 1997. A resumption of official lending, which had been halted during the 1997 crisis, helped to more than finance the deficit and enable foreign exchange reserves to increase.

5.    The winding up of the pyramid schemes, which triggered the crisis, is entering its final stages. Foreign administrators, who were appointed in 1997, sold some of the assets for which clear title is available, and have now turned over to local administrators the task of disposing of the remaining assets and distributing the proceeds to investors. The government will finalize this task as quickly and transparently as possible. The auditors' final report on the schemes was presented in April 1999. Moreover, parliament has passed legislation designed to prevent a recurrence of the pyramid scheme phenomenon. In particular, a revised Banking System Law (drafted with assistance from the IMF and designed to prevent illegal activities and ensure that only financial institutions can take deposits) was approved by parliament in June 1998, a draft Money Laundering Law has been prepared by the Bank of Albania, and the enforcement of the Companies Law and other commercial laws is being improved.

6.    The reforms needed to sustain recovery have continued. To complement the clean up of the informal financial sector, the government has taken measures to restructure the state-owned banks: the Rural Commercial Bank was put into liquidation, the National Commercial Bank (NCB) has been prepared for privatization and a foreign strategic buyer selected, and the Savings Bank is now required to adhere to a governance contract which gives veto power in key operational decisions to foreign advisors. A further 450 small- and medium-sized enterprises (SMEs) have been privatized since the beginning of 1998, one of the remaining four enterprises formerly under the Enterprise Restructuring Agency has been leased to foreign investors and two others are being liquidated. Agricultural land registration has proceeded at a brisk pace. Over staffing in the civil service has been reduced with employment cuts of more than 10 percent since the beginning of 1998.

7.    Nevertheless, Albania's development needs remain substantial: per capita GNP is only about US$800 and the social safety net is stretched thin; basic infrastructure is lacking or in poor repair; the financial system is underdeveloped; the tax base needs to be broadened further; and institutional capacity needs to be strengthened.

Contents

III.  Objectives, Strategies, and Policies for 1999 and the Medium Term

8.    The priorities identified in the previous PFP remain applicable if the economy's growth potential is to be maximized and social problems addressed. The government is committed to further fiscal consolidation in order to stabilize inflation at levels close to that of Albania's main trading partners (Table 2). Provided sufficient external assistance is made available to finance refugee-related government expenditures, the domestically financed budget deficit will be reduced to about 5  percent of GDP this year and to around 3 percent of GDP by 2001. The declining deficit will provide room for a significant expansion of private sector credit and will help raise domestic savings. In conjunction with our efforts to remove structural impediments in the economy, we thus expect to be able to sustain growth at 7–8 percent per year over the medium term and achieve a permanent reduction in the current account deficit. Reserve cover will be maintained at the equivalent of at least 3  months of imports of goods and services.

9.    The reform priorities have not changed. The financial sector must be restructured to ensure that savings are intermediated to the private sector in a productive way. The tax base must be broadened by improving tax compliance and extending direct taxation if resources for development and social needs are to be generated. The size of the public sector must be reduced through privatization, and its effectiveness improved through a public administration program encompassing a reduction in the size of the government workforce and increased salary differentiation to attract and retain qualified staff. A functioning agricultural land market must be established if the full productive capacity of agriculture is to be realized. Last, but not least, the government must-and will-make concerted efforts to engender respect for public institutions and law and order, fight corruption, and create an independent and impartial judiciary.

A.  Fiscal Policy

10.    The 1999 budget reflects the government's firm commitment to further fiscal stabilization. With additional external financing envisaged in the program, the domestically financed deficit will be reduced to 5  percent of GDP, down by 1 percentage point from 1998, and about half the value in 1997.

11.    The measures necessary to reach the deficit target have already been largely implemented. On the revenue side, a 1( percentage point of GDP increase in tax revenues will result from a strengthened income and profit tax law, in particular the introduction of a 10 percent withholding tax on interest income; and from efforts to strengthen tax compliance, including the introduction of new tax and customs codes and the implementation of anti-smuggling measures. The crisis in Kosovo will not loosen the government's resolve to implement these latter measures effectively. The overall increase in revenues will, however, be modest as the profit transfer from the Bank of Albania will decrease with lower interest rates.

12.    On the expenditure side, savings on current expenditures, excluding those relating to the Kosovo crisis, and interest payments will help to finance increases in outlays for operations and maintenance and for investment. Personnel expenditures will decline as a share of GDP as a result of a 3  percent reduction in budgetary employment and moderate wage increases, and spending on social assistance will decline as a result of better targeting. Total expenditure, however, is projected to rise to about 35 percent of GDP in 1999, from 31 percent of GDP in 1998, as a result of the government's contribution to assisting the refugees from Kosovo. The budgetary cost of the crisis, currently estimated at about US$138 million, is subject to a high degree of uncertainty. It includes aid for families hosting the refugees, and outlays for educating refugee children, health, policing, and infrastructure. The government, in consultation with IMF and World Bank staff, will ensure flexible, transparent, and accountable use of budgetary funds for humanitarian relief. Specifically, it will prepare a framework for allocating budgetary resources; add separate expenditure categories to the budget; establish a monitoring mechanism for the use of the funds; establish an account for all refugee-related financial aid; and implement guidelines and procedures for the use of funds in this account.

13.    In order to boost spending on infrastructure, health, education, and the social safety net over the medium term, while achieving further fiscal consolidation, an increase in the tax-to-GDP ratio will be needed. The strategy is to strengthen tax compliance and broaden the tax base. To improve tax compliance, the government will give particular focus to customs collection through: strengthening penalties for smuggling and corruption and giving greater power and resources to the customs authorities to investigate fraud; further improving recruitment and training (with assistance from the EU); implementing, with foreign assistance, the reference valuation file to improve import valuation; and enforcing anti-corruption measures, backed with stiff penalties for offenders. The government will also implement measures to widen tax payer registration and enhance auditing of tax returns.

B.   Monetary and Exchange Rate Policy

14.    Provided sufficient external assistance is made available to finance refugee-related government expenditures, the Kosovo crisis should have a limited impact on monetary conditions. The Bank of Albania will continue its efforts to reduce inflation. This will permit further reductions in nominal interest rates while maintaining positive real interest rates. The central bank will continue to operate under a flexible exchange rate regime, generally limiting intervention to that necessary to smooth excessive fluctuation in the exchange rate while maintaining adequate reserve cover. Fiscal consolidation will provide room for a healthy expansion of private sector credit. To control monetary developments, the Bank of Albania will prepare during 1999 to move to indirect monetary policy instruments, and terminating the use of minimum interest rates and credit ceilings. In particular, establishing an active treasury bill market to determine equilibrium interest rates will allow the central bank to lift interest rate restrictions. Also, the central bank will establish sound procedures for banking supervision enabling it to abolish its current policy of bank-by-bank credit ceilings.

C.   External Sector Policies

15.    External sector policies will aim at improving the balance of payments position by strengthening exports, tourism, and foreign direct investment. The government is committed to maintaining an open trade system and regularizing relations with external creditors.

16.    The government intends to further liberalize the trading system. The few remaining export bans (on skins, hides, and scrap metal) will be eliminated by end-July 1999. Moreover, excise taxes on domestic and imported goods have been unified, with the excise tax levied on the duty-inclusive customs value. Following a review of the structure of tariffs in November 1998, the government is finalizing a medium-term plan for tariff reform, which envisages a phased reduction in the average tariff rate through the lowering of the maximum tariff rate from 30 percent to 20 percent in April 1999, to 18 percent in 2000, and to 15 percent in 2001. The government will also reduce import tariffs on gasoil from 20 percent to 10 percent by end-October 1999.

17.    Albania is actively pursuing accession to the WTO. An updated memorandum on the foreign trade regime was submitted to the WTO in 1998 and is being examined by the Working Party on Albania's accession request to determine its consistency with WTO rules.

D.   Sectoral and Structural Policies

Reform of the banking sector

18.    The priority in the banking sector during the coming year is to privatize the remaining state-owned banks, a necessary condition for the creation of a well-functioning financial system. Plans for the sale of the NCB are already well advanced and it is expected that privatization can be completed by mid-1999. The government is also preparing the Savings Bank for privatization: the foreign advisors have prepared an action plan to streamline the bank's operations and the government is reviewing the amount of compensation for agency services in order to put its financial relations with the bank on a clearer commercial footing. The law for the privatization of the bank will be in place by end-September 1999 and the privatization process will be initiated before the end of the year with a view to selecting a buyer by March 2000.

19.    The legal framework for the financial sector is now generally good. A revised Bank of Albania Law was approved by parliament in late 1997 and a revised Banking Law in 1998. What remains is finalization and passage of a Law on Secured Transactions, expected to be completed by September 1999, and passage shortly afterwards of the Money Laundering Law. Passage of the Money Laundering Law and its effective enforcement will permit the Bank of Albania to remove remaining restrictions on capital account transactions by companies and individuals. The priority is to improve the enforcement of banking laws and regulations. To this end, a set of core prudential regulations broadly in line with the Basle Core Principles has been adopted, licensing requirements for new banks and capital adequacy requirements for all banks are being strengthened, and the Bank of Albania is receiving technical assistance from the IMF and World Bank to strengthen both on- and off-site bank supervision. To improve the payment system, the Bank of Albania has introduced SWIFT communications with commercial banks and preparations are underway to adopt a large-value transfer system in the form of a real-time gross settlement system. In addition, the Savings Bank has concluded agreements with Italian and Greek banks to allow low-cost transfer of remittances from Albanians working in Italy and Greece and an arrangement with Moneygram to provide further facilities to transfer funds from these and other countries. To strengthen financial discipline, the Loan Collection Agency (LCA) has begun collecting on its portfolio of bad loans. The LCA will prepare a business plan and strategy where it will also specify its budget and resources. The LCA will continue to improve its operational efficiency and effectiveness.

Security, public order, and strengthening the judiciary

20.    Security and public order remain top of the authorities' agenda and the government will work with the UN weapons collection program to collect stolen weapons. Also, with assistance from external donors, the government will proceed with measures to strengthen the police force including the implementation of transparent hiring procedures, the review of the wage structure, and training on all levels.

21.    The government is resolved to remove shortcomings in the judiciary system, which, if unaddressed, will impede economic development. The government has made some progress in strengthening the legal sector, including by amending the Law on the Organization of the Judiciary and by establishing a Judicial Inspection Office. Despite these achievements, however, much remains to be done.

22.    The development of a modern and efficient legal system requires the installation of a transparent and consistent legal framework. The government will increase the transparency of the legal framework by ensuring that all laws and regulations are published prior to coming into effect. For this, a State Publication Office is being established and a registration and dissemination system for legal information will be introduced. A Law Reform Commission will identify gaps and inconsistencies in the current legal system and will propose concrete measures for improvement. Transparency will also benefit from the full implementation of the Judicial Inspection Office, charged with investigating complaints against individual magistrates. To strengthen the office, the government will establish its procedures and provide adequate office space and material support. The government will also facilitate out-of-court settlement of commercial disputes by establishing their legal basis and implementing an alternative dispute resolution center for commercial transactions.

23.    The government will also reinforce the professional qualification of legal and judicial professionals. All first instance judges with less than ten years of service will be given a test by mid-1999, and those failing will be removed from office. Legal education will be improved in the short run through reforms at the Tirana Law School in the areas of testing and admission, although deeper reforms at the Law School will be needed in the medium term. The salary structure in the judicial area will be reviewed with a view to reducing incentives for corruption, and explicit criteria for appointment and dismissal of judges will be established to limit executive authority over the judiciary. In the area of internal administration, the government will strengthen the independence of judicial courts by giving them some financial responsibility.

Reform of the public sector and civil service

24.    The government will continue its efforts to establish an effective and efficient public administration and civil service. A key part of the government strategy is its Anti-Corruption Action Plan, which was approved in summer 1998, after taking into account donor comments and the results of a corruption survey and a high level conference on corruption. In addition to its efforts to fight corruption in the customs administration and judiciary (see above), under the Action Plan the government will, among other things: post public information at schools, hospitals, and other sites, on the agreed level of budget funding and fees for services as well as information on the municipality and NGOs to which complaints can be addressed in cases where supplementary payments are requested; and revise the Civil Service Law by mid-1999 and issue complementary implementing regulations aimed at depoliticizing public employment and establishing a civil service based on merit. The government will also modify procedures to increase the frequency of verification of the declaration of personal assets by ministers and senior officials.

25.    To facilitate public administration restructuring, the government has already started to conduct functional reviews of ministries. A review of the Council of Ministers was completed in March 1999 and will serve as pilot case for reviews in other ministries, with the results being used for concrete action to achieve higher efficiency. Reviews in the Ministries of Finance, Justice, Local Government, and Education will be completed by end-1999. Further reviews in 2000 will be complemented by a more general public expenditure review, to be conducted with assistance from the World Bank. To improve public expenditure management, the authorities, with technical assistance from the World Bank, IMF, and EU are also implementing a fully functioning treasury system and improving the budget formulation and execution process. In this context, steps will be taken during 1999 to integrate the investment and recurrent budget planning processes.

26.    The government will shortly establish a Civil Service Commission to oversee the implementation of a professional and depoliticized civil service. The government also intends to redefine the role and functions of the Department of Public Administration and orient its tasks toward implementing the civil service reforms. An inter-ministerial committee for public administration reform has been established with an action plan to coordinate the reform efforts between the institutions involved. To increase the accountability of the civil service, audit capacities of the Supreme Audit Institute will be improved and the government will implement fully the public procurement law.

27.    To address shortcomings in the area of human resource management, the government will by October 1999 complete its review of the salary structure in the civil service and adopt a strategy for implementing a revised salary scale which is more competitive with the private sector without violating the government's fiscal targets. Transparent recruitment procedures and merit-based promotion and compensation will be introduced throughout the civil service. In order to conduct more focused personnel management, the government will strengthen the central database on budget sector employment. Further steps will also be taken to reduce overstaffing: abstracting from temporary positions created by the Kosovo crisis, the number of budget sector employees will be reduced from 133,000 at end-March 1999 to 130,000 by end-1999, with further reductions in the medium term based on the functional reviews of ministries.

Employment

28.    The government is aware that only sustained economic growth will generate sufficient employment opportunities. Nonetheless, to overcome potential short-run rigidities, the government will expand existing micro credit schemes with assistance from external donors, facilitating access to financing in particular in rural areas. Also, the government will draw on donors for continued assistance in setting up equity funds to help establish new enterprises.

Agriculture and the land market

29.    The creation of a functioning agricultural land market is essential if the full productive capacity of the agricultural sector is to be realized. To remove impediments to land sales, parliament approved in April 1998 a package of laws which clarified and simplified the legal framework for land transactions, removing the articles relating to priority claims in land sales, establishing a procedural framework for the leasing of agricultural land (including for long-term leases of state-owned range and forest land and allowing foreigners to take long-term leases on agricultural land) and allowing undistributed state lands to be used to compensate former landowners in cases of conflicting claims on land holdings. The government also opened land registries in all districts, and has committed itself under the ESAF-supported program to achieve benchmarks on the number of cadastral zones where first registration would be completed and on the number of transactions in agricultural land.

30.    The main steps which still need to be taken relate to those areas where ownership claims are uncertain or disputed. To deal with these, the government will, by end-April 1999: (i) reconstitute the system of local, district and central land commissions to provide land distribution documents where these have not already been issued; (ii) formalize ownership of "refused" land; and (iii) develop a plan to resolve pending land compensation claims, with a view to completing the process by end-1999. In addition, the government will produce a medium-term development plan for the Chief Registrar's Office, and will increase office space provided to land registries in all districts where space is less than the recommended minimum of 300 square meters.

Infrastructure

31.    The government is committed to addressing deficiencies in the infrastructure that could impede recovery and long-term economic growth. To that end, it will continue to implement projects in the transport, power, telecommunications, and water sectors in collaboration with external donors. Addressing the problems in the electricity utility, KESH, and the water companies is particularly pressing. By end-May 1999, the government, in coordination with the World Bank, will prepare a financial forecast which will clarify the financial position of KESH, and propose measures to improve collection, reduce losses, and reduce supply disruptions. The plan will include: (i) measures to strengthen the management of KESH, including through an incentive-based foreign governance contract; (ii) a clear financial plan for 1999 and later years; (iii) quarterly targets for reducing theft, improving collections, installation of meters and meter boxes, and disconnection of customers in arrears; and (iv) measures to facilitate payment of bills.

Privatization

32.    The government is taking steps to accelerate the process of enterprise privatization and restructuring. A comprehensive Privatization Strategy was approved by parliament in April 1998, and came into effect in September. Since then, the remaining former Enterprise Restructuring Agency (ERA) enterprises and most of the SMEs have been sold, leased, or liquidated. Of the remaining 169 SMEs, over 100 will be privatized (either by sale or long-term lease) or liquidated by September 1999.

33. Privatization will be vigorously pursued in the strategic sectors. The government will bring Albania Mobile Communications to the point of sale by end-1999 and begin the privatization of the fixed line telephone company, Albanian Telecom, by end-1999. In the mining sector, the chromium and copper companies will be restructured and all small mines will be spun off and either privatized or liquidated by end-September 1999. A plan for the privatization or liquidation of Albchrom (chromium) and Albbaker (copper), including a clear timetable, will also be approved by then. The petroleum company, Albpetrol, has been split into three companies. In 1999, it is the intention to privatize the service company and commence the privatization of the refining and marketing company. The government will commence the privatization of the exploration and production company in 2000. The privatization of electricity and water companies will start in 2000–2001.

Health

34.    Health services are of very poor quality and the government acknowledges that strong measures are needed to achieve significant improvement. To better match the provision of health services with the needs of the population, the government will continue to delegate more authority to local levels. It will develop the Tirana Regional Health Authority and evaluate potential for its adaptation to other parts of Albania. Planning and management capacities will be strengthened at all levels of the health system through professional training and by setting a system of incentives to increase efficiency. The government will encourage the expansion of more autonomous health services and strengthen the necessary regulatory framework. At the same time, it will improve management and planning capacity at the health insurance fund, and extend coverage gradually if PER shows evidence of increased revenues. A study on health sector financing will be initiated in 1999. Based on its results, and the results of the public expenditure review, the government will restructure health expenditures to ensure that resources can be used more effectively and that improvements in health services can be sustained.

Education

35.    Albania's education sector remains in need of substantial improvement and the government will continue to upgrade the sector's inadequate physical infrastructure and address structural deficiencies. The focus will be on improving quality as well as utilizing available resources more efficiently. The government will formulate the strategy of education development at all levels, focusing on teacher development, targeted enrollment rates, measures to improve the quality of teaching, and the role of the private sector. It will review governance and financing of education and the current management structure, and remove duplicate layers of management and clarify responsibilities. It will also undertake a school mapping exercise and consolidate schools in line with the results to reduce the current mismatch between education supply and demand both with regard to geography and quality, and develop a plan of construction of new schools where needed. Finally, it will review the numbers of teachers employed in the various sections, adjusting the numbers where necessary. For this, the government will draw on the public expenditure review that will be conducted with assistance from the World Bank. Social safety net

36.    Even with the strong projected economic growth, further measures will be needed to reduce poverty in the medium term. Better targeting of social assistance is necessary, in general because of the tight budget situation and in particular with regard to the rural population that has remained largely outside Albania's social safety net. As a first step, the government will set up a database of recipients of social assistance in 1999 that will allow a more focused distribution of benefits. An improved social assistance program will be complemented by the development in 2000 of community-based social services for vulnerable groups. The government will also develop a pension reform strategy based on an actuarial policy model aimed at establishing an economically viable pension system over the medium term. In this context, it will link eligibility for pensions in rural areas to payment of contributions and cease crediting transfers from the budget to finance the pension deficit in lieu of insurance contributions paid by farmers, beginning with the 2000 budget.

E.   Improving Statistics

37.    The government and the BoA will continue efforts to improve the quality, coverage, and timeliness of economic and financial data. To address the key deficiencies, the authorities will implement a work program that was prepared in collaboration with a multitopic mission from the IMF Statistics Department in February 1999. By end-June 1999, the government will establish an inter-agency Statistics Council headed by the Institute of Statistics (INSTAT) and including representatives of the Ministry of Finance, the BoA, the Customs Directorate and other agencies, which will formulate statistical policies, coordinate the production of statistical data, and have the authority to request budgetary resources for statistical work. One of the key objectives of the council will be to prepare the ground for Albania's participation in the General Data Dissemination System (GDDS), which is currently impeded only by a lack of adequate national accounts. Accordingly, the government has requested external assistance, including a short-term expert, and will also recruit additional staff for INSTAT's national accounts unit.

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IV.  External Financing Requirements

38.    The external current account deficit is projected to rise sharply from 6 percent of GDP in 1998 to 12 percent of GDP in 1999 mainly as a result of higher import demand arising from the effects of the Kosovo crisis and from investment and reconstruction needs. On the assumption that the Kosovo crisis is resolved by end-1999, the external current account deficit is projected to decline throughout the medium term to 6 percent of GDP in 2002 (Table 3). The projected decline reflects the positive impact on domestic savings of further fiscal consolidation and structural reforms. Thus, although import demand will remain substantial in the medium term, policies should encourage a rapid expansion of the currently small export base and a further expansion of private remittances. Moreover, rising private foreign direct investment is projected to displace some of the need for official financing, assuming regional political stability holds. Foreign exchange reserve cover will be maintained above 3  months of imports of goods and services.

39.    The total financing requirement for the second annual arrangement is some US$475 million. Roughly US$415 million of the total financing need is expected to be met by direct investment, other private inflows, and support from multilateral and bilateral donors that has already been committed. The latter would include disbursements of the IMF ESAF loan of almost US$17 million, project-related lending of some US$100 million from various multilateral and bilateral donors, official transfers and grants of about US$80 million, budgetary and balance of payments support of some US$175 million from the World Bank and the European Union, and the nonconcessional one-year deferral of all debt service to Paris Club creditors. The remaining gap of about US$60 million could be filled by new pledges of balance of payments and budgetary support, which are expected to be made at the CG meeting scheduled for late May 1999. Assuming that the Kosovo crisis does not exert a continuing negative influence on the balance of payments, financing gaps in 2000 and beyond are more modest-on the order US$40–50 million a year. The total financing requirements under the ESAF-supported arrangement are described in Table 3.

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V.  External Debt Management

40.    Albania's external debt burden is not excessive. At end-1998, medium- and long-term external debt (including arrears) amounted to about 30 percent of GDP. In 1999, total debt service due is estimated at about US$26 million, equivalent to 8 percent of exports of goods and services and less than 1 percent of GDP. Despite its relatively low indebtedness, Albania will strictly limit the amount of new external debt obligations it contracts or guarantees on nonconcessional terms.

41.    Although Albania has made great strides toward eliminating its external arrears, further efforts will be made to regularize its relations with external creditors. Albania is working to finalize bilateral agreements with Russia and Italy on debt rescheduling as soon as possible. Negotiations with other bilateral and commercial creditors are ongoing with a view to agreeing on an appropriate arrangement to clear arrears on at least comparable terms with the Paris Club debt rescheduling.

42.    The government aims to improve the monitoring of external debt and aid and speed up aid disbursements. With technical assistance from UNCTAD, the government developed an external debt database and began producing monthly reports on external debt. Operational databases for external debt and grants will be completed by end-June 1999 and the government, with technical assistance, will formalize the procedural, institutional, and legal framework for monitoring and servicing external credits and grants by end-1999. The government will ensure timely reporting of external debt, including of commitments by state-owned enterprises. The government will also remove obstacles to timely disbursement of foreign aid by: streamlining aid disbursement procedures, clarifying institutional responsibilities and strengthening the coordination of project management between donors and the authorities, providing adequate funds for VAT and customs duties reimbursement.

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VI.  Technical Assistance Requirements

43.    During 1999 and over the medium term, Albania will need to make further progress in improving its institutional framework and implementation capacity. Substantial assistance will continue to be needed from the international community, especially in the areas of security, public order, and the judiciary, and in areas of economic management such as customs and tax administration, budget preparation, public administration reforms, banking supervision and financial sector reform, and external debt and aid monitoring. The government is grateful for the significant support it is already receiving from the Fund, the World Bank, the EU, and other donors.

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