IMF Executive Board Concludes 2010 Article IV Consultation with Albania

Public Information Notice (PIN) No. 10/81
July 12, 2010

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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2010 Article IV Consultation with Albania is also available.

On May, 24, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Albania.1

Background

Despite Albania’s limited integration into global markets, the global financial crisis was transmitted through several channels. As elsewhere in the region, Albanian banks witnessed substantial deposit withdrawals in the fall of 2008. The recession in trading partners—particularly Greece and Italy—led to falling exports. Finally, remittances and nonclassified inflows, while imprecisely measured, are estimated to have fallen drastically.

The authorities were able to use accumulated policy space to soften the immediate blow from the crisis, and Albania has performed better than other regional and European economies. In particular, (i) ample liquidity buffers were utilized to meet deposit withdrawals; (ii) monetary conditions were loosened, initially by quantitative easing via BoA direct liquidity injections, followed by interest rate cuts; and (iii) considerable fiscal stimulus was also provided. Growth continued at an estimated 2.8 percent in 2009 and inflation has mostly been in line with the target of 3±1 percent, though depreciation pass through and higher electricity prices recently lifted inflation above 4 percent.

However, policy buffers are now exhausted and need rebuilding. Especially given the significant risks emanating from the challenging external environment and sizeable domestic vulnerabilities, quick progress is essential to redress internal and external imbalances. With private sector adjustment already under way, the budget must achieve a significant turnaround to bring down the current account deficit and make space for credit extension to the private sector.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They observed that Albania’s previously accumulated fiscal and monetary policy space provided buffers that have helped soften the impact of the global crisis. Directors noted that the authorities’ decisive actions had supported the economy and prevented a surge in financial risks. However, policy buffers now have been depleted and must be rebuilt to safeguard macroeconomic stability, given significant downside risks from the external environment and domestic vulnerabilities.

Directors generally called for timely and decisive fiscal tightening in 2010 to reduce financing risks and crowding out of private investment, and help contain external imbalances. They recommended both one-off and structural revenue and expenditure measures, and advised saving the remaining contingency reserves in the 2010 budget. They also encouraged the authorities to pursue civil service reform, keep wages and pensions in check, and strengthen public investment execution.

Directors emphasized the importance of lowering public debt to sustainable levels in the medium term and welcomed the authorities’ commitment to cut public debt levels significantly. In support of this goal, they saw merit in a sound medium-term fiscal policy framework governed by a credible and monitorable fiscal rule. Directors endorsed the authorities’ efforts to diversify financing sources, while recommending that the authorities keep all options on the table, especially in light of current heightened uncertainty in international markets.

Directors commended the authorities’ early and successful adoption of macroprudential measures. They stressed the need for continued vigilant supervision in face of worsening domestic credit quality and rising external risks, in particular potential spillover risks related to recent developments in Greece. Directors also recommended the development of contingency plans to deal with tail risks, as well as the supervisory and macroprudential toolkit to address emerging challenges.

Directors considered that the monetary policy framework and the flexible exchange rate have served Albania well by keeping inflation in check and helping the economy weather external shocks. They encouraged the authorities to continue the cautious monetary stance and focus on anchoring inflation expectations, while remaining mindful of financial stability considerations and macroprudential needs.

Directors welcomed progress on structural reforms, while emphasizing the importance of further improvements in the business environment and investor protection to improve competitiveness and broaden sources of growth. They recommended tackling obstacles to the effective operation of privatized industries, establishing a clear property rights system, strengthening rule enforcement, and addressing weaknesses in economic statistics.


Albania: Basic Indicators and Macroeconomic Framework, 2007–10

 
 

2007

2008

2009

2010

     

Est.

Proj

 
  (Growth rate in percent)

Real GDP 1/

6.0

7.8

2.8

2.3

Retail prices (avg.)

2.9

3.4

2.2

3.5

Retail prices (end-period)

3.1

2.2

3.5

2.9

  (Percent of GDP)

Saving-investment balance

       

Foreign savings

10.3

15.3

14.0

12.6

National savings

19.l

17.3

15.0

13.3

Public

2.2

3.2

1.1

-0.4

Private

16.8

14.1

13.9

13.6

Investment

29.4

32.5

29.0

25.9

Public

5.9

8.6

8.8

5.1

Private

23.5

23.9

20.2

20.8

Fiscal sector

       

Revenues and grants

25.7

26.8

26.0

25.2

Tax revenue

23.6

24.3

23.5

22.9

Expenditures

29.6

32.3

33.4

30.3

Primary

26.9

29.4

30.2

27.0

Interest

2.6

2.9

3.1

3.3

Overall balance (including grants)

-3.9

-5.5

-7.4

-5.2

Primary balance (including grants)

-1.2

-2.7

-4.3

-1.8

Net domestic borrowing

1.8

1.7

0.9

2.5

Privatization receipts

1.6

0.5

2.4

0.0

Foreign financing

0.5

3.2

3.7

3.1

Public Debt

53.9

55.2

59.7

62.8

Domestic

38.2

36.8

36.0

36.6

External (including publicly guaranteed)

15.7

18.4

23.7

26.2

Monetary indicators

       

Broad money growth

13.7

7.7

6.8

7.0

Private credit growth

48.2

32.1

10.3

8.6

Velocity

1.3

1.3

1.3

1.3

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

6.3

6.3

6.3

(Percent of GDP unless otherwise indicated)

External Sector

       

Trade balance (goods and services)

-26.7

-26.8

-25.0

-22.7

Current account balance (including official transfers

-10.3

-15.3

-14.0

-12.6

Current account balance (excluding official transfers)

-11.3

-15.9

-14.7

-13.3

Official transfers

1.0

0.7

0.7

0.7

Gross international reserves (in millions of Euros)

1,467

1,721

1,621

1,586

(In months of imports of goods and services)

4.1

4.2

4.2

4.2

(Relative to external debt service)

12.1

12.4

9.5

3.7

(In percent of broad money)

23.3

26.1

26.0

23.9

Change in real exchange rate (e.o.p., in percent)

0.5

-0.6

Memorandum items

       

Nominal GDP (in billions of lek) 1/

967

1,088

1,153

1,217

 

Sources: Albanian authorities; and IMF staff estimates and projections.
1/ GDP data for 2007–08 are from the official national accounts.


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.http://www.imf.org/external/np/sec/misc/qualifiers.htm.



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