Statement by an IMF mission to Albania

Press Release No. 07/91
May 9, 2007

The following statement was issued today in Tirana by the International Monetary Fund's (IMF) mission to Albania:

"Albania has reached a pivotal stage in its economic development. Increasing foreign direct investment and rapid financial sector development, supported by macroeconomic stability, point to a faster pace of convergence to emerging market standards. However—to seize these opportunities effectively—significant risks must be successfully managed. The serious deterioration of the financial position of KESH is a major obstacle to progress and has to be expeditiously and comprehensively addressed. The interim package agreed with the authorities will temporarily stabilize the company's financial position and contain the budget impact. However, a more lasting solution is needed. The privatization of KESH, agreed with the World Bank last year, needs to be implemented as soon as possible. In other areas, ending a culture of tax evasion and improving government dialogue with business and civil society over necessary reforms will be key.

"The quantitative and structural performance criteria for end-March 2007 under the IMF program were met. However, risks to price stability and growth have increased, reflecting rapid credit growth and the deterioration of the financial position of KESH.

"Energy sector weaknesses reflect a combination of factors. There are chronic problems with collection and loss performance, regional import prices for electricity have increased sharply and are well above domestic retail prices—which have remained fixed since last year. The company is now trying to improve its collection and loss performance, and contain costs to bring them back in line with the new Power Sector Action Plan. But more fundamental actions will be needed to create a culture of payment compliance, and ensure that domestic prices are brought up to cost-recovery levels.

"Disappointingly, budgetary resources will have to be used this year to shore up the financial position of KESH, but a more permanent solution is urgently needed. The authorities have agreed that no more than lek 5 billion of budgetary resources should be used, in large part from new tax measures. But this budget support is temporary, and can only provide limited breathing space. The authorities should continue to work closely with the World Bank and other key development partners in this area to ensure that the agreed privatization strategy can be achieved successfully, and as quickly as possible. In this context, we are heartened by the support for a speedy privatization that has been expressed across the political spectrum.

"The budget is on track. Revenue performance is in line with projections and contingencies are adequate. The additional tax measures foreseen for 2007 will further bolster revenues. Budget execution has improved somewhat with a welcome acceleration of domestically-financed investment. The introduction of the mid-year review of investment projects is important to ensure that spending plans are allocated and executed effectively. The 2007 fiscal targets, which balance the need for debt reduction with economic development objectives, are to be maintained, despite the costs arising from KESH. Net credit to government remains capped at 2½ percent of GDP. However, given the government's commitment to use half of the proceeds from strategic privatizations to reduce debt, domestic borrowing could be lower if the Albtelecom transaction is completed as planned in 2007.

"More needs to be done to make revenue administration efficient and business friendly. The role of the Tax Police has been reviewed, with part of the staff now reallocated to more high-yielding activities such as audit and enforcement. In this context, while we fully support measures to enhance the General Department of Taxation's capacities to enforce tax collection, this must not infringe on taxpayers' unconditional right to appeal their tax assessments. Equally important, the practice on VAT refunds and procedures needs to be brought fully into line with the law.

"Progress is being made in strengthening debt management. Maturities of debt instruments continue to be lengthened, the range of instruments and the investor base are being broadened, and capacities at the Treasury are being enhanced.

"Monetary policy has contained inflation to target, but there are new challenges. Last year's increases in the Bank of Albania's (BoA) policy rate were well timed, and a strengthening of banking regulation and supervision has helped to maintain financial stability. But budgetary risks and continued very strong credit growth will test policy; nonetheless we remain convinced that the BoA will take the appropriate steps. Looking ahead, the establishment of the credit bureau will further contribute to maintaining credit quality. Further consolidation of the banking sector will bring about a more competitive and stable financial sector.

"While the establishment of the Financial Supervisory Authority has been an important milestone, further efforts are needed to enhance its operational independence. Also, with the leasing industry now set to take off, it will be important to transfer full responsibility for its supervision and regulation to the BoA.

"Lastly, the government's intention to prepare the forthcoming National Strategy for Development and Integration in close consultation with the general public and other stakeholders is encouraging. Only through sincere collaboration can this exercise result in a true strategy for the entire country. We believe that such a consultative approach would also be helpful in other areas of policy making.

"The mission would like to thank the authorities for their continued close cooperation and warm hospitality."



IMF EXTERNAL RELATIONS DEPARTMENT

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