IMF Executive Board Concludes 2008 Article IV Consultation with AlbaniaPublic Information Notice (PIN) No. 08/94
July 29, 2008
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On July, 25, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Albania.1
Over the last decade, macroeconomic performance has generally been strong and per capita GDP in US dollar terms more than doubled. A Stabilization and Association Agreement with the EU was signed in 2006, and an invitation to join NATO extended in the spring of 2008. Rapid growth, price stability, and continued large remittances also significantly improved social conditions and moved the country toward Millennium Development Goals. Macroeconomic stability has been maintained and inflation is among the lowest in the region.
Strong fiscal policy, largely based on major improvements in tax administration, lowered public debt from 66 percent of GDP in 2001 to 53 percent in 2007. More recently, tax policy reforms have further boosted revenues—to be allocated in the supplementary budget to investment projects.
With such supportive fiscal policy, the Bank of Albania was able to maintain low inflation, despite a rise in recent months above the 3±1 percent target range, that was driven mainly by higher world food prices. Underlying inflation remains low and, going forward, inflation is projected to return into the target band within the year, notwithstanding unfavorable global inflation trends and pressures from the ongoing transition process.
Risks to domestic and external stability have receded somewhat. Domestic credit growth, though still elevated, has decelerated from past highs, and the authorities adapted regulatory and supervisory regimes to keep abreast with the rapidly developing financial system. Exports are growing strongly, though temporary factors have pushed up the current account deficit.
However, progress with structural reform has been uneven. On the one hand, tax reforms, financial market development, and large scale privatization have provided strong incentives for investment. In contrast, turning around the loss-making electricity sector has proved elusive despite repeated attempts. The core of the problem is unpaid electricity usage—the average effective collection rate, at around 50 percent, remains low compared even with the regional average of about 75 percent. Moreover, wide-spread governance concerns and the weak business environment are already factors in the recent slowdown in productivity growth.
Executive Board Assessment
Executive Directors praised the authorities' macroeconomic policy stance that has led to a prolonged period of strong noninflationary growth and sustained improvement in living standards and social conditions, despite a deteriorating external environment. Directors also welcomed the good progress in structural reforms, and encouraged the authorities to undertake early action on the remaining agenda in reforming the electricity sector and in improving the business climate.
Directors concurred that the current stance of monetary policy is appropriate. Given that exogenous shocks implied upward pressure on prices in the near and medium-term—compounding pressures associated with the transition process—Directors noted that monetary conditions might need to be tightened if second-round effects appeared or inflationary expectations deteriorated.
Directors considered external competitiveness to be broadly adequate, and stressed the importance of ensuring that macroeconomic and structural policies continue to safeguard external stability going forward, particularly in light of the authorities' plans to rely more on international capital markets in the future.
Directors encouraged the authorities to set fiscal policy within a transparent medium-term framework. They considered the authorities' goal of reducing debt to 50 percent of GDP by 2011 to be consistent with debt sustainability, macroeconomic stability, and the need to meet Albania's still-considerable development needs. Safeguarding progress made in debt sustainability will require a prudent debt management strategy and a cautious approach to borrowing on international capital markets. Directors welcomed the authorities' intention to limit the 2008 deficit to 5.2 percent of GDP and to adopt an explicit fiscal rule guiding future budgets. They commended the authorities' recent decision to address the welfare effects of rising food prices through targeted subsidies.
Directors regarded continued financial sector development as a prerequisite for maintaining rapid economic growth. The banking system appears sound, and exposure to the current global financial turmoil is slight. Regulatory and supervisory capacity needs to keep pace with the sector's development to mitigate the attendant risks. In this regard, Directors considered that the immediate priority lay in improving cross-border supervisory collaboration, contingency planning, and collateral execution. Directors also saw an important role for regulatory and supervisory measures in supporting monetary policy, given the still undeveloped monetary transmission mechanism and high degree of euroization.
Directors observed that, with efficiency gains from the transition process likely to gradually wane, maintaining strong growth as a middle-income country would increasingly depend on improvements in both institutional quality and infrastructure. This would help to attract foreign direct investment and improve productivity. In this regard, Directors considered that past initiatives, such as the one-stop business licensing procedure, had been effective, and encouraged the authorities to initiate further business-friendly reforms. In addition, they encouraged the authorities to improve governance, strengthen the judicial system, and tackle corruption. Directors noted continuing problems in the electricity sector, and stressed that the authorities would have to follow through with their new action plan for the Albanian Power Corporation (KESH) if another electricity tariff increase in the near future was to be avoided. Progress in this area would facilitate the planned privatization of KESH's distribution company.
Directors welcomed the authorities' intention to improve the reliability and timeliness of statistics. Addressing the lack of skilled staff and insufficient resources in the statistical agency would help maximize the usefulness of Fund technical assistance.