Press Release No. 06/164

Press Release: IMF Executive Board Completes First Review Under PRGF Arrangement and First Review Under EFF Arrangement with Albania and Approves US$3.6 Million Disbursement

July 24, 2006

The Executive Board of the International Monetary Fund (IMF) today completed the first review of Albania's performance and financing assurances under the three-year Poverty Reduction and Growth Facility (PRGF) arrangement and the Extended Fund Facility arrangement (EFF). The completion of the reviews enables the release of an amount equivalent to SDR 2.43 million (about US$3.6 million), which will bring the total disbursement under both arrangements to SDR 4.87 million (about US$7.2 million).

In completing the reviews, the Board approved the authorities' request for a waiver for the nonobservance of the structural performance criterion on the state-owned electricity company KESH meeting the targets under the 2006-2008 Power Sector Action Plan with regards to collection rates and losses.

The concurrent three-year arrangements under the Poverty Reduction and Growth Facility (PRGF) and the Extended Fund Facility (EFF) amounting to the equivalent of SDR 17.045 million (about US$25.2 million) were approved on February 1, 2006 (see Press Release No. 06/17).

Following the Executive Board's discussion of Albania, Ms. Anne O. Krueger, First Deputy Managing Director and Acting Chair, stated:

"Albania's macroeconomic performance over the past year has been good, with strong growth, large inward remittances, and a significant reduction in poverty. Debt is declining, and macroeconomic stability has been maintained, with inflation remaining low. Although the current account deficit has deteriorated somewhat, the lek has continued to strengthen, reflecting rising confidence and declining risk premiums.

"The expectation is for growth to moderate slightly in 2006, but to return to a faster pace in 2007 and over the longer term. However, sustaining this pace will require significant reforms to improve infrastructure and institutional quality—including in governance and the rule of law. Such reforms will enable Albania to attract the high-quality investment needed to develop further the export sector, which remains small.

"The current rapid growth of financial intermediation is a positive development, and necessary for sustained high growth. However, the rate of increase must remain consistent with macroeconomic and financial stability, and the program provides for this. Actions will be taken to tighten gradually prudential regulations and enhance banking supervision, to safeguard loan quality. Work is also under way to establish a credit bureau and improve the legal framework for collateral execution. These measures are expected to reduce the rate of credit expansion by increasing effective lending costs.

"The program's fiscal framework and the supplementary budget for 2006 are consistent with the authorities' strategy of developing a small but efficient government concentrated on its core functions. A rising share of expenditure will be devoted to investment and other priority areas, while future gains from tax administration reform will be devoted to tax relief and debt reduction. The supplementary budget allocates projected structural revenue gains according to this strategy.

"Future growth-enhancing institutional reforms will focus on areas directly impacting the business climate, such as property rights and contract enforcement. Privatization is to be accelerated in non-core areas of government, including in the distribution arm of the electricity company (KESH)," Ms. Krueger said.