IMF Executive Board Concludes 2013 Article IV Consultation with Albania

Press Release No. 14/109
March 19, 2014

On February 28, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the 2013 Article IV Consultation with Albania.1

Albania successfully avoided recession in the aftermath of the global crisis and suffered a milder growth shock than neighboring countries. Recently, however, the economy has shown signs of protracted weakness and macroeconomic imbalances have widened.

Weak investor confidence, bank risk aversion, as well as incomplete investment climate reforms, have amplified the slowdown. Real GDP growth is expected to decline to 0.7 percent in 2013, the lowest in more than a decade. Inflation has remained low, largely within the central bank’s 2–4 percent target range, reflecting the negative output gap. The external current account deficit has begun to adjust on account of oil exports and import compression, but weak external drivers are preventing a sustained reduction.

The fiscal position deteriorated significantly in 2013. Public debt and financing needs—among the highest in the Central, Eastern and Southeastern European region—have risen because of fiscal loosening prior to the 2013 elections, the accumulation of significant unpaid bills and arrears, and the weak economy. Fiscal deficits have been driven up also by structural factors, with pensions exerting a heavy fiscal burden.

The banking system has been resilient to eurozone stress so far, largely because it relies almost exclusively on domestic deposits. Banks’ strong solvency ratios and stringent provisioning rules have also contributed to banking system stability. Nevertheless, non-performing loans (NPLs) have increased considerably, further constraining credit growth and putting pressure on bank profitability.

The authorities have requested IMF’s financial assistance in support of their program to boost growth and support macroeconomic stability. The program seeks to: i) reverse the upward trend in public debt and lay the ground for its sustained reduction; ii) restore banks’ confidence in lending by bringing down NPLs and; iii) ease constraints on growth by undertaking ambitious structural reforms, including in the areas of pensions, energy, public administration, and the business environment. The program will be supported by an IMF arrangement under the Extended Fund Facility (see Press Release No. 14/81).

Executive Board Assessment2

Executive Directors commended the authorities for their adoption of a package of measures to restore fiscal sustainability, safeguard financial stability, and improve the investment climate, which will be critical for reviving the economy and allowing sustained medium-term growth. Noting the significant risks from underlying imbalances, they looked forward to strong and lasting commitment to the program.

Directors stressed that given Albania’s high debt, fiscal consolidation should aim to lower the public debt ratio to below 60 percent of GDP in the medium term. Achieving this objective requires significant further tax and expenditure policy measures, supplementing the steps taken in late 2013 and in the 2014 budget, supported by extensive public financial management and tax administration reforms. Adopting a medium-term budget framework or fiscal rule would anchor the commitment to the debt target. Directors generally agreed that the burden of fiscal adjustment should fall primarily on revenues, given the country’s development needs and the low share of revenues in GDP. Pension and energy reforms should form a key part of medium–term adjustment. Reducing the outstanding stock of arrears and putting in place mechanisms to prevent their recurrence is critical for fiscal sustainability and restoring confidence. At the same time, Directors underscored the importance of proceeding cautiously with payments and employing an external auditor promptly to begin conducting ex post risk-based audits.

Directors commended the authorities for maintaining low inflation under the inflation-targeting framework. Most Directors saw scope for moderate monetary policy easing to support economic recovery, provided inflation expectations and financial stability remain well anchored. Nevertheless, they stressed the need for a cautious approach, given that further easing could increase the risks posed by high unhedged foreign currency exposure, while its effectiveness could be limited by sluggish credit demand and bank risk aversion. Directors also encouraged the removal of exchange restrictions as soon as possible.

Directors underscored the importance of continued vigilance to maintain financial stability. They encouraged prompt and comprehensive action to address rising non-performing loans to help boost bank profitability and credit growth, including through removing impediments to collateral execution and loan restructuring, and clearing arrears. Strengthening the regulation and supervision of the nonbank financial system, in line with recommendations from the recent Financial Sector Assessment Program, will help alleviate systemic risks.

Directors stressed that embarking on a path of sustained medium-term growth hinges on the implementation of ambitious structural reforms. Planned reforms include pensions, energy, local government, public administration, and measures to improve the business environment. If implemented properly, these reforms should strengthen Albania’s ability to attract investment, reduce fiscal risks, and strengthen debt sustainability.


Albania: Basic Indicators and Macroeconomic Framework, 2009–13
 

 

 

2009

2010

2011

2012

2013 (Est.)
 

Real sector

 

(Growth rate in percent)

Real GDP

 

3.3 3.8 3.1 1.3 0.7

Consumer Price Index (avg.)

 

2.3 3.5 3.4 2.0 1.9

Consumer Price Index (eop)

 

3.7 3.4 1.7 2.4 1.9

GDP deflator

 

2.0 2.6 3.5 2.1 1.7

Saving-investment balance

 

(Percent of GDP)

Foreign savings

 

14.1 10.0 9.6 9.3 9.0

National savings

 

16.2 16.9 16.2 15.0 15.2

Public

 

1.0 1.2 1.6 0.9 -1.0

Private

 

15.2 15.6 14.6 14.1 16.2

Investment

 

30.3 26.9 25.8 24.3 24.2

Public

 

10.1 6.8 6.2 5.2 6.2

Private

 

20.2 20.1 19.6 19.1 18.0

Fiscal sector

 

(Percent of GDP)

Revenues and grants

 

26.0 26.1 25.8 24.9 24.0

Tax revenue

 

23.6 23.6 23.7 22.7 21.6

Expenditures

 

33.5 29.9 29.3 28.4 30.1

Primary

 

30.3 26.5 26.1 25.2 26.9

Interest

 

3.2 3.4 3.2 3.1 3.2

Unidentified measures (cumulative)

 

 

 

 

 

 

Overall balance

 

-7.4 -3.8 -3.6 -3.5 -6.2

Primary balance

 

-4.3 -0.4 -0.4 -0.3 -2.9

Net domestic financing

 

3.3 1.4 1.9 2.3 5.4

of which: Privatization receipts

 

2.4 0.4 0.0 0.1 1.2

Foreign financing

 

3.7 2.1 1.6 1.2 1.0

Public Debt

 

59.5 58.5 60.3 62.4 70.5

Domestic

 

36.1 33.3 34.2 35.5 43.7

of which: Unpaid bills and arrears

 

        5.3

External (including publicly guaranteed)

 

23.3 25.2 26.0 27.0 26.8

Monetary indicators

 

(Growth rate in percent)

Broad money growth

 

6.8 12.5 9.1 5.0 2.9

Private credit growth

 

10.3 10.1 10.4 1.4 -3.0

Velocity

 

1.3 1.2 1.2 1.2 1.2

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

 

6.3 5.3 5.3 5.0 3.3

BoA repo rate (in percent)

 

5.3 5.0 4.8 4.0 3.0

External sector

(Percent of GDP, unless otherwise indicated)

Trade balance (goods and services)

 

-24.7 -20.9 -23.1 -19.0 -17.1

Current account balance (including official transfers) 

-14.1 -10.0 -9.6 -9.3 -9.0

Current account balance (excluding official transfers)

 

-14.7 -12.0 -12.5 -11.0 -10.4

Official transfers

 

0.7 2.1 2.9 1.7 1.4

Gross international reserves (in billions of Euros)

 

1.6 1.9 1.9 2.0 2.0

(In months of imports of goods and services)

 

4.1 4.4 4.5 4.8 4.8

(Relative to external debt service)

 

2.4 3.4 8.4 7.9 5.8

(In percent of broad money)

 

26.0 27.0 24.9 24.6 24.6

Change in real exchange rate (eop, in percent)

 

-7.8 -2.5 -0.5 -1.1

Memorandum items

 

 

 

 

 

 

Nominal GDP (in billions of lek)

 

1148.1 1222.5 1282.3 1326.5 1357.9

Output gap (percent, - = gap)

 

1.8 1.8 1.7 0.5 -1.5
 

Sources: Albanian authorities; and IMF staff estimates and projections.


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.

2 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. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.



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