Albania and the IMF
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The International Monetary Fund (IMF) today approved a three-year loan for Albania under the Enhanced Structural Adjustment Facility (ESAF)1, equivalent to SDR 35.3 million (about US$47 million), to support the government’s 1998-2001 economic program. The first annual loan, equivalent to SDR 11.77 million (about US$16 million), is available in two equal semiannual installments, the first of which is available immediately.
Since starting its transition to a market-based economy in 1991, Albania has experienced dramatic swings attributable to both the successes and the failures of adjustment. The initial downfall was precipitous, with 1992 output dropping to one-half its 1989 level, inflation in triple digits, and the external current account deficit equivalent to almost two-thirds of GDP. The ascent in 1993-95 was also steep, with GDP growth averaging near double digits, single-digit inflation, and sharply reduced external imbalances. By 1996, the rapid growth was supported more by activities related to financial pyramid schemes and election-driven loose fiscal policy. The collapse of the pyramid schemes in 1997 triggered a deep economic and social crisis, bringing the economy to a standstill.
The new government that took office in mid-1997 adopted a two-stage strategy. The first, which was supported under the IMF’s post conflict emergency assistance policy, successfully initiated macroeconomic stabilization, the rebuilding of institutional and administrative capacity, and restarting of structural reforms. During the second half of 1997, inflation fell faster than projected, economic growth resumed, and confidence in the currency increased significantly. The second stage is a comprehensive medium-term macroeconomic and structural program supported by the ESAF.
Medium-Term Strategy and the 1998/99 Program
The main objectives of Albania’s medium-term strategy are to sustain rapid growth and reduce inflation further, with a view to generating employment and reducing poverty. Over the three-year program, the authorities intend to achieve sustainable growth of 7-8 percent; reduce inflation to the levels of Albania’s main trading partners (to about 3 percent by 2001); and maintain international reserve cover at about 3¾ months of imports of goods and nonfactor services externally. The goal is to bring down the current account deficit to levels consistent with medium-term viability.
Fiscal policy is designed to support these objectives by reducing the domestically financed deficit to about 6½ percent of GDP in 1998 from about 11 percent GDP in 1997, with a gradual reduction to about 3 percent by 2001. Monetary policy will also support inflation targets through appropriate interest rate policy and judicious application of credit ceilings.
In the first year of the program, GDP growth is targeted at 10 percent in 1998 following an estimated decline of 7.0 percent in 1997; inflation is anticipated to fall to 10 percent during 1998, from 42.1 percent during 1997. The external current account deficit is expected to be the equivalent of 13.8 percent of GDP in 1998, compared with 11.9 percent in 1997, reflecting a pick-up in imports to meet the economy’s large post crisis investment and reconstruction needs. Exports and private remittances are expected to recover more gradually in response to improvements in security, structural reform, and macroeconomic stabilization. Although fiscal policy calls for a rather sharp reduction in the deficit in 1998, in line with the inflation target, the impact will be softened by the availability of significant external budgetary support; this will allow a temporary expansion of the social safety net to alleviate a crisis-induced increase in poverty. This, plus the resumption of investment projects facilitated by a substantial increase in foreign aid, is expected to result in a somewhat higher overall deficit in 1998. Regarding monetary policy in the short term, the Bank of Albania is committed to maintaining minimum deposit rates at levels which are positive in real terms and which are sufficient to encourage growth in lek deposits. However, there should be scope later in 1998 to lower nominal rates as inflation falls and pressure on the financial system to finance the budget deficit is reduced.
The government’s commitment to resolve the pyramid scheme problem remains firm and the program contains a number of specific measures to ensure that this is accomplished and that the phenomenon cannot recur. Foreign administrators, who have been appointed for all of the companies which operated schemes, will accelerate their efforts to liquidate the assets of the five remaining companies and an international accounting firm has been appointed as auditors to assist them.
Banking sector reform is an essential element of Albania’s program. The government plans to privatize or liquidate state banks, whose lending, in the meantime, will be limited and whose management will be placed under the control or supervision of competent advisors. The authorities’ ultimate goal is to create a banking system based on well-functioning and well-regulated private banks. A revised Banking System Law has been approved by the Council of Ministers, and further revisions of the legal and regulatory process and improvements to banking supervision are planned.
Structural reforms in four other areas are particularly important: enterprise privatization; the creation of a functioning market in agricultural land; reform of public administration, including measures to combat corruption; and encouragement of remittances and transfers from Albanians living abroad. Major progress has already been made in establishing an agriculturalland market with the passage of a new law and regulations to make the registration and sale of agricultural land easier.
Addressing Social Needs
Lasting alleviation of poverty is crucial to reversing the social consequences of the 1997 crisis and requires sustained high growth driven by private sector development. In the short term, the government will receive external budgetary support, enabling it to temporarily expand its current social assistance scheme to help the sharply increased number of needy families resulting from the crisis. The government also intends to alleviate poverty by providing employment through community works. Budgetary allocations will be released at an accelerated pace and guidelines will be developed in cooperation with international agencies to make greater use of foster care and home care for the elderly.
The Challenge Ahead
The most fundamental risk to the program is the security situation within the country and in the region, given the implications for economic confidence, and especially for investment prospects. Also of particular importance will be the steadfast implementation of structural measures.
Albania joined the IMF on October 15, 1991, and its quota2 is SDR 35.3 million (about US$47 million). Its outstanding use of IMF financing currently totals SDR 39.9 million (about US$54 million).
1The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and to improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years, with a 5½-year grace period.
IMF EXTERNAL RELATIONS DEPARTMENT