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Public Information Notice (PIN) No. 03/27
March 7, 2003
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2002 Article IV Consultation with Albania

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2002 Article IV consultation with Albania is also available.

On February 26, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Albania.1

Background

Sound financial policies and market reforms during most of the 1990s have fostered growth and macroeconomic stability. Nonetheless, poverty remains pervasive, and the sustainability of growth is dependent on the expansion of tradables, in particular industry and mining. However, investment in these sectors is hindered by a deficient business climate including administrative barriers and electricity shortages. The authorities' November 2001 poverty reduction and growth strategy contains wide-ranging measures for the promotion of private sector activity and poverty alleviation. Within this framework, the current Poverty Reduction and Growth Facility (PRGF) arrangement supports efforts to ensure a sound macroeconomic environment. Monetary policy aims at maintaining inflation within a 2-4 percent range, within a floating exchange rate system. To promote fiscal and external sustainability, the overall deficit is to be lowered from 8.5 percent of GDP in 2001 to 5.8 percent of GDP by 2005.

Economic growth appears to have fallen below the 7 percent estimated historical average, to 4.7 percent in 2002. High foreign investments and private remittances in 2001 have maintained robust import demand, reflected in a widening trade deficit in 2001 and the first half of 2002. The exchange rate has remained fairly stable.

The fiscal deficit has remained well within the budgetary limits, despite serious tax collection shortfalls since end-2001. The latter have likely reflected lower-than-expected GDP growth, delays in reform, and managerial changes, in the context of ambitious collection targets. The overall deficit (excluding grants) declined to 8.5 percent of GDP in 2001 and is estimated at 7.5 percent in 2002. Combined with external debt forgiveness, this has reduced total public debt to about 64 percent of GDP from about 72 percent at end-2000.

Concerns about rising inflation—which peaked at 7 percent in early 2002—prompted some tightening of monetary policy. The increase in the repo rate since mid-2001—from 6.5 percent to 8 percent—was also motivated by high currency in circulation—in part due to sizable deposit withdrawals from the largest two banks, in March and April 2002, based on unfounded rumors of solvency problems. Stability has since returned and deposits have been recovering.

Structural reforms have slowed since mid-2001, with delays in privatization and, since mid-2002, slippage in electricity sector reform. Political changes, together with the weakened global market, hindered the planned mid-2002 sale of the Savings Bank and Albtelekom. While the authorities have made significant progress in reforming the ailing energy sector, drought has caused severe electricity shortages in recent years. Moreover recent slippage in meeting targets for bill collection and losses could prolong the crisis.

Executive Board Assessment

Executive Directors commended the authorities' efforts to make progress toward a market economy through sound macroeconomic management as well as actions to revive the reform process since the elections in 2002. In the context of the recent slowdown in activity, Directors noted that impediments to private sector development threatened the prospects for growth and poverty alleviation. They stressed that, in order to promote a business-friendly environment, it is necessary to accelerate the implementation of structural reform, improve the physical and financial infrastructure, and strengthen the enforcement of the rule of law and governance, including by fighting corruption. Directors considered that the prospect of a Stabilization and Association Agreement with the EU provides a strong framework and a unique opportunity for pushing ahead the reform process.

Directors welcomed the observance of fiscal deficit targets in 2002 and supported the budgetary framework for 2003. In light of the weaknesses in revenue collection last year, they concurred with the more cautious approach followed by the authorities in projecting revenues in 2003. In this context, they also emphasized the continuing need to focus on sustainable improvements in revenue collection, by broadening the tax base, strengthening administration, and combating smuggling, while at the same time ensuring a fair application of the tax law. For the medium term, Directors considered that raising revenues remains key to permitting the needed expansion in social expenditures, while also keeping the fiscal balances within prudent limits and offsetting the likely decline in external concessional financing. Directors also underscored the need for careful prioritization and management of spending to avoid ad hoc cuts in public investment, should revenues fall short of targets.

Directors expressed concern that electricity shortages continue to seriously constrain growth and pose risks to private sector development, and therefore urged the authorities to bring the electricity sector reforms back on track, in close collaboration with the World Bank. They reiterated their support for the authorities' commitment to phasing out subsidies for electricity imports before 2005. Directors recommended that the authorities should continue with their efforts to put in place a price mechanism to reflect market conditions and enhance the financial viability of the electricity company. It was also suggested that the authorities should consider over time how best to diversify their energy sources. Directors also stressed the importance of a timely settlement of inter-enterprise arrears within the public sector, and of the adoption of strategies to prevent the accumulation of new arrears.

Directors commended the authorities' prudent monetary policy, which had been critical in containing inflationary pressures, and the progress to an indirect control regime. They supported the recent introduction of a deposit insurance system, with the aim of promoting financial sector confidence. Directors also encouraged the Bank of Albania to closely monitor the increasing dollarization and the rapid foreign currency growth.

Directors emphasized the importance of financial sector reform, and welcomed plans to strengthen and modernize the financial system. They encouraged the authorities to give the highest priority to the successful privatization of Savings Bank, which could be facilitated by some restructuring and improved marketing. This, and other actions, are required to help improve competition in the banking system and more generally allow a larger role for banks in private sector development. Directors encouraged further efforts to strengthen bank supervision. They commended the authorities' efforts in blocking funding for terrorists, and encouraged the authorities to improve implementation of the Money Laundering Law.

Directors urged the authorities to persevere with legal and institutional reforms to improve the climate for business and investment. In this context, they welcomed the authorities' commitment to combating corruption and the ongoing implementation of their anti-corruption program. These actions would also help reduce the size of Albania's large informal sector. Directors, however, noted that, as stressed in the staff's analysis, much remains to be done, and urged the authorities to intensify efforts in this area. They underscored, also, the importance of high-level resolve and broad political support to ensure that these efforts are successful. Directors commented on the need to modernize the operation of public enterprises, wherever necessary, and to move ahead with the privatization program.

Directors commended the authorities for maintaining a flexible exchange rate regime and an open trade system, and for making progress in negotiating several regional free trade agreements. They noted that, while a more rapid expansion of exports was primarily constrained by non-price factors, the authorities should also closely monitor price competitiveness.

Directors strongly supported the authorities' renewed focus on improving the availability of economic data through greater cooperation among agencies and the provision of adequate resources. However, noting that data deficiencies continue to seriously hamper effective policy-making, they urged further concerted efforts in this area.

Directors noted the progress Albania has made in regularizing arrears with its foreign creditors and encouraged the authorities to take the necessary steps to resolve outstanding issues as soon as possible to allow a move to Article VIII status.


Albania: Selected Economic Indicators


   

1999

2000

2001

2002

 

 

 

 

 

Est.


           
   

(Percent Change)

           

Real GDP

7.3

7.8

6.5

4.7

Retail prices (avg.)

0.4

0.0

3.1

5.6

Retail prices (end-period)

-1.0

4.2

3.5

3.0

           
   

(In percent of GDP)

Fiscal sector

       
 

Revenues

21.3

22.4

23.0

23.5

 

Expenditures

32.7

31.4

31.5

31.0

 

Overall balance (excluding grants)

-11.4

-9.1

-8.5

-7.5

 

Domestically financed balance 1/

5.2

3.2

3.1

3.0

 

Public Debt

64.1

72.1

69.6

64.4

 

Domestic 2/

35.1

41.9

40.9

39.6

 

External

29.1

30.2

28.7

24.7

           

Monetary indicators

       
 

Broad money growth (in percent)

22.3

12.0

19.9

7.6

 

Interest rate (3-mth T-bills, end-period) 3/

14.8

7.8

8.0

11.1

           
   

(In millions of U.S. Dollars)

External sector

       
 

Trade balance 4/

-663

-821

-1027

-1096

 

(in percent of GDP)

-18.0

-21.9

-25.0

-23.7

 

Current account balance

-270

-271

-260

-410

 

Gross international reserves

485

608

737

809

 

(in months of imports of goods and services)

3.8

4.1

4.6

4.9

           

Memorandum items

       
 

Nominal GDP (in millions of lek)

506,205

539,210

590,237

658,062

 

Nominal GDP (in millions of U.S. dollars)

3,676

3,745

4,109

4,628

 

 

 

 

 

 


Sources: Albanian authorities; and IMF staff estimates and projections.

   
           

1/

Excluding privatization revenues.

       

2/

Including bonds for bank restructuring (lek 24.6 bn for 2000).

   

3/

For end-November 2002.

       

4/

For 1999 excluding imports of direct humanitarian aid related to the Kosovo crisis.

 

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. 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.




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