## ALBANIA — 2017 Article IV Consultation (Staff Report) ## Source details **Canonical URL:** [ALBANIA — 2017 Article IV Consultation (Staff Report)](https://www.imf.org/-/media/files/publications/cr/2017/cr17373.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17373.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17373.pdf.json) --- ### Context and recent developments - Context: - Albania is making good progress in raising living standards but experienced a buildup of macroeconomic vulnerabilities prior to recent reforms. - Ruling Socialist Party won a clear majority; intends to focus on improving the business climate, property rights, and public administration while continuing fiscal consolidation. - Albania is under Fund Post-Program monitoring. Data provision is adequate for surveillance. - Recent macro developments: - Real GDP growth: 3.4 percent in 2016; accelerated to 4 percent (yoy) in 2017:Q2. - Inflation: around 1¾ percent (yoy) in 2017:Q3; core inflation remains at ½ percent amidst a negative output gap. - Credit: overall credit to the private sector declined largely due to writeoffs of NPLs; adjusted for write-offs, credit grew by around 3 percent (yoy) in 2017:Q2, led by lek credit to households. - Current account and reserves: - Current account deficit narrowed to 7.6 percent of GDP in 2016. - Euro-lek exchange rate appreciated by 3½ percent in nominal terms and 4 percent in REER terms (yoy). - Reserve accumulation reached six months of imports coverage at end-September 2017. - External competitiveness: lags regional peers (EBA-Lite indicates a moderately weaker external position). - Fiscal performance: - Primary balance at end-September stood at 1.1 percent of GDP. - Staff projects general government primary surplus of 0.1 percent of GDP in 2017 (versus initial budget 0.7 percent of GDP). - Net new arrears around 0.3 percent of GDP accumulated in 2017:H1. - Overall general government deficit expected to narrow from 2.3 percent of GDP in 2016 to 2.0 percent in 2017. - Public debt, including arrears, projected to decline to 71.5 percent of GDP at end-2017 from 73.3 percent at end-2016. ### Outlook and risks (growth, inflation, external) - Growth and inflation projections: - GDP growth projected at 3.9 percent in 2017 and 3.7 percent in 2018; medium-term growth projected to increase to 4 percent. - Headline (core) inflation projected to rise to 2.1 (0.8) percent in 2017 (average). - Inflation expected to stabilize around the 3 percent target by end-2018. - Current account and reserves: - Current account deficit projected to widen to 8.0 percent of GDP in 2017 then narrow to 6–7 percent of GDP over the medium term. - Fund credit outstanding estimated at 3.1 percent of GDP or 12.5 percent of gross reserves in 2017. - Debt service to the Fund expected to peak in 2022 at around 0.4 percent of GDP and 1.9 percent of international reserves. - External public debt projected to peak at around 40 percent of GDP in 2018 before falling to 34 percent of GDP in 2022. - Risk assessment: - Risks are balanced. - Upside: improved confidence, accelerated donor support, greater spillovers from FDI projects. - Downside: global shocks, prolonged drought affecting electricity generation and quasi-fiscal risks, abrupt exit of a large foreign bank, volatile domestic politics, weaker fiscal consolidation. ### Fiscal policy: sustainability, consolidation, and medium-term paths - Overarching priorities: - Ensure fiscal sustainability, reduce risks, and achieve a more efficient and growth-friendly budget. - Fiscal anchor and targets: - Authorities committed to lower the debt ratio below 60 percent of GDP by 2021, consistent with the 45 percent of GDP debt objective under the Organic Budget Law. - Staff recommended adopting the primary balance (excluding one-offs) as a fiscal anchor, supported by an independent fiscal council (Annex VI). - 2018 budget and medium-term framework: - 2018 budget seeks to maintain the same overall deficit target of 2 percent of GDP (per authorities’ definition). - General government primary surplus expected to increase to 0.6 percent of GDP (authorities’ definition) in 2018 compared to the 2017 target of 0.4 percent of GDP (implying a slight relaxation of around 0.2 percent of GDP). - Draft 2018 budget envisages a large scale-up of public investment, new tax breaks (particularly for tourism), containing public wages (except health and education), reducing energy support, and increasing revenues from the value-based property tax and anti-informality compliance gains. - The 2019-2021 budgetary framework assumes an annual improvement in the primary surplus by around ½ percent of GDP to reach a primary surplus of 2.2 percent of GDP by 2021. - Fiscal consolidation record (selected percent of GDP figures): - Revenues: 24.0 (2013); 27.4 (2016); 28.2 (2017 Rev. Budg.); 28.1 (2018 Draft Budg.); 27.9 (2019); 27.8 (2020); 27.5 (2021). - Expenditures: 29.2 (2013); 30.4 (2016); 30.2 (2017 Rev. Budg.); 29.9 (2018 Draft Budg.); 29.7 (2019); 29.4 (2020); 29.3 (2021). - Overall balance: -5.2 (2013); -2.3 (2016); -2.0 (2017 Rev. Budg.); -1.9 (2018 Draft Budg.); -1.8 (2019); -1.6 (2020); -1.8 (2021). - Primary balance: -2.0 (2013); 0.2 (2016); 0.1 (2017 Rev. Budg.); 0.3 (2018 Draft Budg.); 0.4 (2019); 0.6 (2020); 0.9 (2021). - Public debt: 70.4 percent of GDP (2013); 73.3 (2016); 71.5 (2017 Rev. Budg.); 71.2 (2018 Draft Budg.); 68.7 (2019); 66.7 (2020); 64.0 (2021). - Medium-term fiscal paths (selected IMF baseline and recommended path figures, percent of GDP): - Public debt (IMF baseline): 2016 73.3; 2017 71.5; 2018 71.3; 2019 68.7; 2020 66.7; 2021 64.0. - Public debt (IMF recommended path): 2016 71.0; 2017 69.8; 2018 66.1; 2019 63.4; 2020 60.0. - Primary balance (IMF baseline): 2016 0.2; 2017 0.1; 2018 0.4; 2019 0.6; 2020 0.9; 2021 0.9. - Primary balance (IMF recommended path): 2016 0.6; 2017 1.2; 2018 1.5; 2019 1.5; 2020 1.5. - Required additional measures: - Additional permanent measures of 1 percent of GDP over 2018–19 would be needed to achieve the 60 percent debt target. - Safeguarding the original primary balance target in 2017 by locking in existing savings and avoiding inefficient year-end spending would also help. - Note on fiscal buffers: - Debt projections include a buildup of a precautionary fiscal buffer of 1 percent of GDP over four years. Currently, the size of the fiscal buffer is limited due to legal constraints. ### Tax policy, revenue measures, and tax efficiency (measures and quantified estimates) - Rationale: - Staff recommended fiscal adjustment to stem mainly from revenue measures because tax efficiency is low in Albania, reflecting higher tax thresholds and weak tax compliance; heavy reliance on specific taxes has led to low tax elasticity to GDP. - Recommended tax actions: - Indexation of excises and national taxes on observed inflation (e.g., fuel excise, carbon tax, circulation tax, car registration). - Broaden the VAT base (drugs, machineries, new residential property sales, education, advertisement, tourism). - Reintroduce small business income tax. - Reduce the zero-tax threshold to the minimum wage level. - Introduce environment and health-related excises. - Administration reforms focused on modern compliance risk management; caution that planned tax and customs merger risks derailing this effort. - Tax measure estimates (in percent of GDP; sequences correspond to 2018, 2019, 2020, 2021 where applicable): - Measures already/being taken by the government: - Harmonize cigarette excise towards EU standards: 0.12; 0.06; 0.05; 0.05. - Increase the base for social security contributions: 0.09; -; -; -. - Lower VAT rate for tourism-related activities: 0.00; -; -; -. - Other exemptions (IT, high-tech): -0.01; -; -; -. - Permanent tax measures assumed in the baseline: - Ad valorem transfer duty and pilot property tax: 0.12; 0.10; -0.10; -. - Value-based property tax: -; -; 0.28; 0.01. - Recommended permanent tax measures: - Index specific excises/national taxes on observed inflation: 0.12; 0.12; 0.11; 0.10. - Broaden the VAT base: 0.05; 0.16; 0.03; 0.03. - Reintroduce small business income tax: 0.15; -; -; -. - Reduce the zero-tax threshold to the minimum wage level: 0.19; -; -; -. - Environment and health-related excises: 0.27; -; -; -. - Note: Other measures in the draft budget (property tax reform, blanket exemption on luxury hotels, reduction in VAT thresholds) could not be quantified. ### Public investment management (PIM), PPPs, and fiscal risks - PIM shortcomings: - Fragmentation of investment projects contributing to poor appraisal, selection, management, and evaluation. - Staff priorities to reduce inefficiencies and fiscal risks: - Operationalize the PIM unit at MoF and improve budgetary processes: project classification, coverage of SOEs and local government in the database, costing of new policies. - Adhere to the MTBF to reduce risks of unfunded commitments and arrears. - PPPs: - Regulatory framework compares well in the World Bank’s survey on Benchmarking PPP Procurement. - Staff recommended: - Strengthening implementation of the PPP framework and using MoF’s expanded legal powers to assess, veto, and monitor PPP projects. - Introducing an aggregate quantitative limit on the total value of all PPP contracts, in addition to the current limit on annual PPP-related budget payments. - Upgrading the capacity of the Fiscal Risks Unit to undertake financial analysis of new PPP contracts and empowering INSTAT to record PPPs in fiscal and debt statistics in accordance with ESA. - Context: New government announced an ambitious PPP program of €1 billion (around 7 percent of GDP), mainly covering transport and health sectors; MoF noted fiscal burden likely to be lower as some road projects would be financed through tolls. ### Arrears, Fiscal Risks Unit, and debt management - Arrears and recommendations: - Quarterly surveys indicated stocks of 0.5 and 0.6 percent of GDP at the central and local government levels, respectively, at end-June 2017. - VAT refund arrears of 0.4 percent of GDP at end-August 2017; staff advised expediting clearance by dedicating adequate cash resources. - To prevent arrears: strengthen commitment controls, expand coverage of Treasury’s IT system (AGFIS), expedite implementing regulations for the new law on local finances. - Fiscal Risks Unit: - Newly-established Fiscal Risks Unit at MoF (with Fund TA) is preparing a statement of fiscal risks to accompany the budget and should assess fiscal risks of PPPs and SOEs. - Debt management and financing risks: - Need further improvements to address risks from public debt and large rollover needs. - High reliance on domestic banks poses systemic risk of a sovereign-banking feedback loop. - Illiquid secondary market leads investors to seek short-term instruments held to maturity; staff advised improving the primary market and developing a liquid secondary market. - Suggested tapping Eurobond markets to amortize FX debt while being vigilant of risks from excessive reliance on FX and nonconcessional borrowing. - Context: €450 million Eurobond maturing in 2020. ### Monetary policy, de-euroization, and FX management - Monetary stance: - Policy rate at a historical minimum of 1¼ percent since May 2016. - BoA forward guidance: monetary tightening will not take place until the second half of 2018 given the still negative output gap, subdued core inflation, and an appreciating exchange rate. - Staff advice: unwinding of monetary easing should be data-dependent and confirm underlying inflationary pressures consistent with reaching the 3 percent target. - De-euroization and FX exposure: - FX deposits account for half of all deposits; FX loans account for 60 percent of total loans. - Unhedged FX borrowers constitute 25 percent of total loans. - BoA announced a comprehensive strategy to reduce the use of foreign currency starting in 2018; staff advised gradual implementation while monitoring FX market impacts. - Specific de-euroization measures: - Increase the ratio of FX liquid assets to FX short-term liabilities from 15 to 20 percent. - Increase required reserve ratio for FX deposits from 10 to 12.5 percent. - Reduce required reserve ratio for lek deposits from 10 to 7.5 percent. - FX interventions and reserves: - Authorities have been executing limited and pre-announced interventions to build up FX reserve buffers; staff advised interventions remain fully transparent and consistent with achieving the inflation target. - Government’s planned issuance of external commercial debt (partly to roll over the €450 million Eurobond maturing in 2020) is expected to further boost reserves. - Central bank governance: - Staff recommended amending the central bank law to align with best international practices on central bank independence. ### Financial sector stability, supervision, and NPL resolution - Banking system status: - Banking system remains stable, liquid, and well capitalized. - NPL ratio is declining but remains high: 15 percent of loans at end-August; 14.8 percent (Jun-17, Sep-17). - Regulatory capital (selected): 15.8 (Dec-16); 16.3 (Mar-17); 16.4 (Jun-17); 16.4 (Sep-17). - Return on equity: Dec-16 16.6; Mar-17 16.7; Jun-17 16.3. - NPL resolution — Box 1 findings and priorities: - Decline attributed largely to mandatory write-offs and BoA’s proactive approach; NPL sales limited due to low expected recovery rates and tax impediments. - Recent developments slowing progress: reform of the resolution framework has slowed; a bylaw increased fixed fees for private bailiffs. - Key recommended actions: - Revise bylaws regulating bailiffs fees. - Issue pending bylaws for out-of-court agreements and adopt the new Bankruptcy Law. - Introduce a rating methodology for the credit registry and develop a credit bureau. - Strictly monitor asset quality and restructured loans. - Analyze and address tax impediments that prevent NPL sales. - Publish a mid-term progress report on the NPL strategy and reactivate the NPL working group. - Regulatory capital implication for EU banks: EU banks face a high capital requirement for holdings of Albanian government bonds because Albanian supervision is not considered fully consistent with EU standards; EU-equivalence could reduce risk weights. - Supervision and macroprudential policy: - New macroprudential strategy approved with objectives to mitigate excessive credit growth, contain systemic risks and market liquidity issues, limit concentration and excessive risk taking. - Staff recommendations: - Focus on risk-based supervision and higher financial buffers for banks expanding to nonbanking activities. - Close cooperation between supervisors to address interconnectedness risks. - Consider an external diagnostic review for high-risk portfolios and enhanced screening for cross-border lending vulnerabilities. ### Bank consolidation and licensing - Staff underscored the need for close communication with EU-owned banks, their parents, and peer supervisors to ensure a smooth bank consolidation. - Regulator guidance: - Avoid awarding new licenses to inexperienced investors. - Ensure candidates for new bank licenses possess adequate banking experience and avoid conflicts of interest. - Aligning supervision with ECB standards could discourage deleveraging by EU banks. ### Nonbank financial sector, markets, and AML/CFT - Nonbank sector: - Strengthening AFSA capacity is crucial; investment funds account for 5 percent of GDP and lack an adequate crisis management framework. - T-bill market volatility due to absence of a liquid secondary market; pilots for longer-dated bonds with World Bank support. - AML/CFT: - Albania strengthened its AML/CFT framework since 2011; undergoing evaluation against the revised 2012 FATF standard. - Onsite visit for the 2012-standard evaluation took place in October 2017; evaluation report expected to be adopted in April 2018. ### External sector assessment (Annex I) — external position and sustainability - External position: - EBA-Lite indicates the external position is moderately weaker than implied by fundamentals and desirable policy settings. - Current account developments: - Current account deficit declined to 7.6 percent of GDP at end-2016. - Trade deficit at 16.9 percent of GDP in 2016. - Imports tied to FDI in large energy projects (especially TAP) contributed around 2.5 percent of GDP in 2016. - Net FDI in 2016: 8.7 percent of GDP, covering over 100 percent of the CA deficit. - REER and competitiveness: - Since early 2016, CPI and PPI-based REERs appreciated by about 7 percent; EBA-Lite indicates a REER overvaluation of about 6 percent. - EBA-Lite exact figures (percent of GDP or points): - Current account norm: -4.9 - Adjusted actual current account: -6.0 - Current account gap: -1.0 - REER gap: 6.1 - External stocks and NIIP: - NIIP worsened to -45 percent of GDP in 2016 from -36 percent of GDP in 2013. - Foreign liabilities reached 110 percent of GDP. - External financing needs at 13.4 percent of GDP in 2016. - Gross FX reserves at 27 percent of GDP at end-2016; FX reserves reached 173 percent of the ARA metric in 2016. ### Debt sustainability analysis (DSA) — baseline, scenarios, and stress tests - Baseline vulnerabilities: - Public debt remains high and poses significant risks despite fiscal adjustment. - About two-fifths of central government domestic direct debt was short-term at end-2016. - Public gross financing needs are projected to remain well above the 15 percent of GDP early warning threshold associated with past debt crises. - Alternative scenarios: - Historical scenario: by 2022 public debt would be around 77 percent of GDP; gross financing needs just over 30 percent of GDP in 2022. - Reasons baseline realistic: current policy break since 2014, authorities committed to reducing public debt, imminent EU accession progress, high FDI inflows. - Stress tests — public debt (selected outcomes): - Combined macro-fiscal shock: debt-to-GDP ratio increases to 81 percent in 2019, then around 78 percent by 2022; gross financing needs stabilize around 27–29 percent of GDP by end of horizon. - Growth shock (one standard deviation in 2018–2019): public debt just under 68 percent of GDP in 2022. - Fan charts: under symmetric distribution, 80 percent confidence interval for debt stock in 2022 ranges between 54 and 70 percent of GDP; under restricted distribution, debt could be above 70 percent of GDP by 2022 with probability almost 25 percent (baseline 62 percent of GDP). - External debt sustainability (selected projections and shocks): - External public borrowing will drive total external debt to peak around 66 percent of GDP in 2018 before declining to 55 percent by 2022. - Public and private external debt service expected to rise to 11 percent of GDP in 2020 as the €450 million 2015 Eurobond amortizes. - Under a 30 percent exchange rate depreciation shock, external debt would peak at 100 percent of GDP in 2018 before declining to 84 percent by 2022. - Under a current account shock of half a standard deviation (around 2½ percent of GDP), external debt would peak at 68 percent of GDP in 2018 and decline to 63 percent by 2022. ### Key quantitative projections (selected time series from staff tables) - Real GDP growth (annual percent): 2013 1.0; 2014 1.8; 2015 2.2; 2016 3.4; 2017 (Prel.) 3.9; 2018 (Proj.) 3.7; 2019 (Proj.) 3.8; 2020 (Proj.) 3.9; 2021 (Proj.) 3.9; 2022 (Proj.) 4.0. - CPI (avg., yoy percent): 2013 1.9; 2014 1.6; 2015 1.9; 2016 1.3; 2017 (Prel.) 2.1; 2018 (Proj.) 2.8; 2019 (Proj.) 3.0; 2020 (Proj.) 3.0; 2021 (Proj.) 3.0; 2022 (Proj.) 3.0. - Current account balance (percent of GDP): 2013 -9.3; 2014 -10.8; 2015 -8.6; 2016 -7.6; 2017 (Prel.) -8.0; 2018 (Proj.) -7.1; 2019 (Proj.) -6.9; 2020 (Proj.) -6.7; 2021 (Proj.) -6.5; 2022 (Proj.) -6.3. - General government debt (percent of GDP): 2013 70.4; 2014 72.0; 2015 74.1; 2016 73.3; 2017 (Prel.) 71.5; 2018 (Proj.) 71.3; 2019 (Proj.) 68.7; 2020 (Proj.) 66.7; 2021 (Proj.) 64.0; 2022 (Proj.) 62.2. - Selected fiscal composition notes (percent of GDP): - Total revenue and grants: 2016 27.4; 2017 (Prel.) 28.2; 2018 (Proj.) 28.1. - Total expenditure: 2016 29.6; 2017 (Prel.) 30.2; 2018 (Proj.) 29.9. - Overall balance: 2016 -2.3; 2017 (Prel.) -2.0; 2018 (Proj.) -1.9. - Primary balance: 2016 0.2; 2017 (Prel.) 0.1; 2018 (Proj.) 0.4. ### Data, statistics, and World Bank Group (WBG) engagement - Statistical assessment: - Data provision broadly adequate for surveillance but shortcomings exist in real sector statistics and inter-institutional cooperation. - National accounts generally compliant with ESA 2010; quarterly GDP estimates released with a lag of 90 days; first annual estimates published around 15 months after year-end. - Labor Force Survey is of insufficient quality; treatment of agricultural employment needs improvement. - GFS: fiscal source data adequate for broad presentation in line with GFSM 2001; further improvements needed. - Albania participates in GDDS and implemented e-GDDS in June 2017. - WBG engagement and financing: - Albania member of WBG since 1991. - WBG support: 88 IDA, IBRD, and GEF projects totaling US$2.07 billion; IFC investments totaling US$490 million; MIGA guarantees totaling US$8.6 million. - Current portfolio size: US$615 million across 10 projects. - Bank–Fund Joint Management Action Plan matrix lists collaborative items (e.g., Strengthening AFSA’s Supervisory Capacities; Fiscal DPL; Public Debt Management and Government Bonds). ### Staff appraisal — key policy recommendations (selected) - Macroeconomic and fiscal: - Continue fiscal consolidation to rebuild room for fiscal policy maneuver and ensure debt sustainability. - Consider a more ambitious and front-loaded consolidation path to reach authorities’ commitment of reducing public debt below 60 percent of GDP by 2021. - Mobilize revenues to support consolidation and priority spending; planned value-based property tax and strengthening tax compliance are welcome but should be carefully planned and sequenced. - Refrain from lowering tax rates or granting new tax exemptions or preferential tax treatments. - Fiscal institutions and PIM: - Strengthen fiscal institutions to mitigate fiscal risks and enhance efficiency. - Revisit announced merger of tax and customs administrations given risks to revenue collection. - Public debt management should focus on lengthening maturity and diversifying investor base while avoiding excessive non-concessional FX borrowing. - Strengthen public investment management: project appraisal and monitoring; ensure PPPs are assessed and monitored; reflect PPP impact transparently in fiscal accounts. - Improve VAT refund process, strengthen commitment controls, and extend coverage of Treasury IT system to minimize arrears recurrence. - Financial sector and NPLs: - Reverse recent regulation on private bailiff fees that hinders collateral execution. - Urgently adopt bylaws to implement the new Bankruptcy Law and facilitate out-of-court restructuring. - Continue efforts to shore up financial supervision and strengthen crisis-preparedness. - Ensure candidates for new bank licenses have adequate banking experience and avoid conflicts of interest. - Develop capital market institutions with high transparency and governance standards. - Electricity sector and SOEs: - Resume and accelerate reforms in the state-owned electricity sector: advance financial restructuring, improve operational efficiency, strengthen corporate governance, resume publication of financial statements. - Establish a power exchange, unbundle distribution, move medium-voltage customers to the free market, make tariff adjustments more frequent and automatic. - Diversify sources of electricity in light of drought-induced fall in hydropower generation. - Monetary policy and de-euroization: - BoA’s accommodative monetary policy stance remains appropriate. - Any unwinding of monetary easing should await clear evidence of a sustained rise in inflation. - Implement de-euroization strategy gradually. - Amend the central bank law to align with modern central banking legislation. - Structural reforms and labor market: - Encourage labor participation, especially among women and youth, by investing in skills and vocational training. - Advance judicial reform, property rights reform, and anti-corruption efforts to improve the business climate, reduce informality, and deepen financial markets. ### Recommendation and surveillance - Recommendation: next Article IV consultation on the standard 12-month cycle. - Monitoring status: Albania will remain under Post-Program monitoring. *Source: International Monetary Fund — cr17373 (excerpts from the 2017 staff report, tables, annexes, and staff appraisals as presented).* ### 2017. The staff team comprised Ms. Tuladhar (head), Messrs. ### ALBANIA — 2017 Article IV Consultation (Staff Report) ### Context - Albania is making good progress in raising living standards but experienced a buildup of macroeconomic vulnerabilities prior to recent reforms. - The ruling Socialist Party won a clear majority and intends to focus on improving the business climate, property rights, and public administration while continuing fiscal consolidation. - Albania is under Fund Post-Program monitoring. Data provision is adequate for surveillance. ### Recent developments - Real GDP growth reached 3.4 percent in 2016 and accelerated to 4 percent (yoy) in 2017:Q2. - Investment gained momentum from large energy-related FDI projects and a revival in construction and tourism services. - Inflation: around 1¾ percent (yoy) in 2017:Q3; core inflation remains at ½ percent amidst a negative output gap. - Credit developments: - Overall credit to the private sector declined, largely due to writeoffs of NPLs. - Adjusted for write-offs, credit grew by around 3 percent (yoy) in 2017:Q2, led by lek credit to households. - Current account and reserves: - Current account deficit narrowed to 7.6 percent of GDP in 2016. - Euro-lek exchange rate appreciated by 3½ percent in nominal terms and 4 percent in REER terms (yoy). - Reserve accumulation reached six months of imports coverage at end-September 2017. - External competitiveness lags regional peers (EBA-Lite model indicates a moderately weaker external position). - Fiscal performance: - Primary balance at end-September stood at 1.1 percent of GDP. - Staff projects general government primary surplus of 0.1 percent of GDP in 2017 (versus initial budget 0.7 percent of GDP). - Net new arrears around 0.3 percent of GDP accumulated in 2017:H1. - Overall general government deficit expected to narrow from 2.3 percent of GDP in 2016 to 2.0 percent in 2017. - Public debt, including arrears, projected to decline to 71.5 percent of GDP at end-2017 from 73.3 percent at end-2016. ### Outlook and risks - Growth projections: - GDP growth projected at 3.9 percent in 2017 and 3.7 percent in 2018. - Medium-term growth projected to increase to 4 percent. - Inflation and current account: - Headline (core) inflation projected to rise to 2.1 (0.8) percent in 2017 (average). - Inflation expected to stabilize around the 3 percent target by end-2018. - Current account deficit projected to widen to 8.0 percent of GDP in 2017 then narrow to 6–7 percent of GDP over the medium term. - Reserves and external debt: - Fund credit outstanding estimated at 3.1 percent of GDP or 12.5 percent of gross reserves in 2017. - Debt service to the Fund expected to peak in 2022 at around 0.4 percent of GDP and 1.9 percent of international reserves. - External public debt projected to peak at around 40 percent of GDP in 2018 before falling to 34 percent of GDP in 2022. - Risk assessment: - Risks are balanced. Upside: improved confidence, accelerated donor support, greater spillovers from FDI projects. - Downside: global shocks, prolonged drought affecting electricity generation and quasi-fiscal risks, abrupt exit of a large foreign bank, volatile domestic politics, weaker fiscal consolidation. ### Policy discussions — overarching priorities - Policies should aim to maintain macroeconomic stability and deepen structural reforms with focus on: - Fiscal policy: ensuring fiscal sustainability, reducing risks, and achieving a more efficient and growth-friendly budget. - Monetary and financial sector policy: strengthening inflation targeting and financial stability. - Structural reforms: strengthening institutions to improve the investment climate and labor force participation. ### Fiscal policy: ensuring fiscal sustainability and growth-friendly consolidation - Recent improvements: - Overall fiscal balance improved by 2.1 percentage points of GDP between 2013 and 2017, mostly through higher revenues. - Fiscal anchor and targets: - Authorities committed to lower the debt ratio below 60 percent of GDP by 2021, consistent with the 45 percent of GDP debt objective under the Organic Budget Law. - Staff recommended adopting the primary balance (excluding one-offs) as a fiscal anchor, supported by an independent fiscal council (Annex VI). - 2018 budget and medium-term framework: - 2018 budget seeks to maintain the same overall deficit target of 2 percent of GDP (per authorities’ definition). - General government primary surplus expected to increase to 0.6 percent of GDP (authorities’ definition) in 2018 compared to the 2017 target of 0.4 percent of GDP (implying a slight relaxation of around 0.2 percent of GDP). - Draft 2018 budget envisages a large scale-up of public investment, new tax breaks (particularly for tourism), containing public wages (except health and education), reducing energy support, and increasing revenues from the value-based property tax and anti-informality compliance gains. - The 2019-2021 budgetary framework assumes an annual improvement in the primary surplus by around ½ percent of GDP to reach a primary surplus of 2.2 percent of GDP by 2021. - Fiscal consolidation record (selected figures from 2013–2021 table): - Revenues: 24.0 (2013), 27.4 (2016), 28.2 (2017 Rev. Budg.), 28.1 (2018 Draft Budg.), 27.9 (2019), 27.8 (2020), 27.5 (2021). - Expenditures: 29.2 (2013), 30.4 (2016), 30.2 (2017 Rev. Budg.), 29.9 (2018 Draft Budg.), 29.7 (2019), 29.4 (2020), 29.3 (2021). - Overall balance: -5.2 (2013), -2.3 (2016), -2.0 (2017 Rev. Budg.), -1.9 (2018 Draft Budg.), -1.8 (2019), -1.6 (2020), -1.8 (2021). - Primary balance: -2.0 (2013), 0.2 (2016), 0.1 (2017 Rev. Budg.), 0.3 (2018 Draft Budg.), 0.4 (2019), 0.6 (2020), 0.9 (2021). - Structural primary balance: -1.7 (2013), 0.5 (2016), 0.6 (2017 Rev. Budg.), 0.5 (2018 Draft Budg.), 0.4 (2019), 0.5 (2020), 0.7 (2021). - Public debt: 70.4 percent of GDP (2013), 73.3 (2016), 71.5 (2017 Rev. Budg.), 71.2 (2018 Draft Budg.), 68.7 (2019), 66.7 (2020), 64.0 (2021). - Implementation of 2016 Article IV recommendations (summary): - Fiscal policy: Continue fiscal consolidation, strengthen fiscal framework and improve debt management — Good. - Broaden tax base, including fiscal cadastre for property tax — Insufficient. - Implement tax administration strategy — Good. - Strengthen public investment management and PPP oversight — Insufficient. - Strengthen public financial management, including of local governments — Moderate. *Source: IMF staff report, 2017.* ### 2021. The strategy relies mainly on tax efficiency gains. ### 2021. The strategy relies mainly on tax efficiency gains. ### Fiscal consolidation and medium-term fiscal paths - Mission recommendation: more front-loaded consolidation to create room for fiscal policy maneuver and improve credibility of the medium-term budgetary framework; avoid relying on a sizable adjustment toward the end of the electoral cycle. - Staff projection (in the absence of tax policy measures): - Public debt to reach around 64.0 percent of GDP by 2021 (excludes debt/contingent liabilities from PPP-financed investments; includes some buildup of fiscal buffers). - Required additional measures: - Additional permanent measures of 1 percent of GDP over 2018–19 would be needed to achieve the 60 percent debt target. - Safeguarding the original primary balance target in 2017 by locking in existing savings and avoiding inefficient year-end spending would also help. - Note on fiscal buffers: - Debt projections include a buildup of a precautionary fiscal buffer of 1 percent of GDP over four years. Currently, the size of the fiscal buffer is limited due to legal constraints. - Medium-term fiscal paths (in percent of GDP) - Public debt - IMF baseline: 2016 73.3; 2017 71.5; 2018 71.3; 2019 68.7; 2020 66.7; 2021 64.0 - IMF recommended path: 2016 71.0; 2017 69.8; 2018 66.1; 2019 63.4; 2020 60.0 - Authorities MTBF*: 2016 70.8; 2017 68.8; 2018 66.4; 2019 63.5; 2020 59.9 - Overall balance - IMF baseline: 2016 -2.3; 2017 -2.0; 2018 -1.9; 2019 -1.8; 2020 -1.6; 2021 -1.8 - IMF recommended path: 2016 -1.4; 2017 -0.9; 2018 -0.7; 2019 -0.7; 2020 -0.8 - Authorities MTBF*: 2016 -2.0; 2017 -2.0; 2018 -1.7; 2019 -1.2; 2020 -0.4 - Primary balance - IMF baseline: 2016 0.2; 2017 0.1; 2018 0.4; 2019 0.6; 2020 0.9; 2021 0.9 - IMF recommended path: 2016 0.6; 2017 1.2; 2018 1.5; 2019 1.5; 2020 1.5 - Authorities MTBF*: 2016 0.4; 2017 0.6; 2018 1.0; 2019 1.5; 2020 2.2 - Structural primary balance - IMF baseline: 2016 0.5; 2017 0.5; 2018 0.5; 2019 0.7; 2020 0.9; 2021 0.9 - IMF recommended path: 2016 1.0; 2017 1.4; 2018 1.6; 2019 1.5; 2020 1.5 - Authorities MTBF*: 2016 0.6; 2017 0.4; 2018 0.9; 2019 1.4; 2020 2.1 - *Based on the authorities' own definitions of debt and deficit (i.e., excluding some energy sector support from the deficit, and omitting PPPs and arrears in the debt statistics). ### Tax policy, revenue measures, and tax efficiency - Staff recommended fiscal adjustment to stem mainly from revenue measures because: - Tax efficiency is low in Albania, reflecting higher tax thresholds and weak tax compliance. - Heavy reliance on specific taxes has led to low tax elasticity to GDP. - Recommended actions: - Indexation of excises and national taxes on observed inflation (e.g., fuel excise, carbon tax, circulation tax, car registration, etc.). - Broadening the VAT base (drugs, machineries, new residential property sales, education, advertisement, tourism). - Reintroduce small business income tax. - Reduce the zero-tax threshold to the minimum wage level. - Introduce environment and health-related excises. - Administration reforms focused on modern compliance risk management; caution that planned tax and customs merger risks derailing this effort. - Tax measure estimates (in percent of GDP; presented as sequences corresponding to 2018, 2019, 2020, 2021 where applicable) - Measures already/being taken by the government - Harmonize cigarette excise towards EU standards: 0.12; 0.06; 0.05; 0.05 - Increase the base for social security contributions: 0.09; -; -; - - Lower VAT rate for tourism-related activities: 0.00; -; -; - - Other exemptions (IT, high-tech): -0.01; -; -; - - Permanent tax measures assumed in the baseline - Ad valorem transfer duty and pilot property tax: 0.12; 0.10; -0.10; - - Value-based property tax: -; -; 0.28; 0.01 - Recommended permanent tax measures - Index specific excises/national taxes on observed inflation: 0.12; 0.12; 0.11; 0.10 - Broaden the VAT base: 0.05; 0.16; 0.03; 0.03 - Reintroduce small business income tax: 0.15; -; -; - - Reduce the zero-tax threshold to the minimum wage level: 0.19; -; -; - - Environment and health-related excises: 0.27; -; -; - - Note: Other measures in the draft budget (property tax reform, blanket exemption on luxury hotels, reduction in VAT thresholds) could not be quantified as their implementation requires secondary legislation. - Authorities’ fiscal stance: - Strong commitment to persevere with fiscal consolidation; recognize meeting the medium-term debt target of 60 percent of GDP by 2021 will be challenging. - Plans to monitor budget execution closely in 2017 and take compensatory measures as needed. - Intend to be cautious about contracting new PPPs and to keep PPP-related budgetary payments under their legal ceiling. - Argue the 60 percent public debt target should exclude buildup in government deposits. - Support consolidation strategy based on broadening the tax base and improving revenue compliance and administration; politically committed to a small government with a low tax burden and wary of raising tax rates. ### Public investment management (PIM), PPPs, and fiscal risks - Key shortcomings in PIM: - Fragmentation of investment projects contributing to poor appraisal, selection, management, and evaluation of public investment projects. - Staff priorities to reduce inefficiencies and fiscal risks: - Operationalize the PIM unit at MoF and improve budgetary processes: project classification, coverage of SOEs and local government in the database, costing of new policies. - Adhere to the MTBF to reduce risks of unfunded commitments and arrears. - PPPs: - Albania’s regulatory framework compares well in the World Bank’s survey on Benchmarking PPP Procurement. - Given fiscal risks from an ambitious PPP agenda, staff recommended: - Strengthening implementation of the PPP framework and using MoF’s expanded legal powers to assess, veto, and monitor PPP projects. - Introducing an aggregate quantitative limit on the total value of all PPP contracts, in addition to the current limit on annual PPP-related budget payments. - Upgrading the capacity of the Fiscal Risks Unit to undertake financial analysis of new PPP contracts and empowering INSTAT to record PPPs in fiscal and debt statistics in accordance with ESA. - Context: New government announced an ambitious PPP program of €1 billion (around 7 percent of GDP), mainly covering transport and health sectors; MoF noted fiscal burden likely to be lower as some road projects would be financed through tolls. ### Arrears, fiscal risks unit, and debt management - Arrears: - Quarterly surveys of arrears indicated stocks of 0.5 and 0.6 percent of GDP at the central and local government levels, respectively, at end-June 2017. - VAT refund arrears of 0.4 percent of GDP at end-August 2017; staff advised expediting clearance by dedicating adequate cash resources. - To prevent arrears: strengthen commitment controls, expand coverage of Treasury’s new IT system (AGFIS), expedite implementing regulations for the new law on local finances to strengthen reporting and monitoring. - Fiscal Risks Unit: - Newly-established Fiscal Risks Unit at MoF (with Fund TA) is preparing a statement of fiscal risks to accompany the budget and should assess fiscal risks of PPPs and SOEs, including investment budgets and financial performance. - Debt management and financing risks: - Need further improvements to address risks from public debt and large rollover needs. - High reliance on domestic banks poses systemic risk of a sovereign-banking feedback loop. - Illiquid secondary market leads investors to seek short-term instruments held to maturity; staff advised improving functioning of the primary market and developing a liquid secondary market per the plan with World Bank support. - Suggested tapping Eurobond markets to amortize FX debt while being vigilant of risks from excessive reliance on FX and nonconcessional borrowing. - Strengthen communication and coordination among BoA, MoF, AFSA, and other stakeholders on liquidity and debt management to avoid excess volatility of T-bill rates. - Context: €450 million Eurobond maturing in 2020. ### Monetary policy and de-euroization - Current stance and guidance: - Policy rate at a historical minimum of 1¼ percent since May 2016. - BoA forward guidance: monetary tightening will not take place until the second half of 2018 given the still negative output gap, subdued core inflation, and an appreciating exchange rate. - Staff advice: unwinding of monetary easing should be data-dependent and confirm that underlying inflationary pressures are consistent with reaching the inflation target of 3 percent over the medium term. - Staff cautioned BoA to consider financial stability risks from unhedged FX exposures of borrowers in case of abrupt exchange rate depreciation following ECB tightening. - De-euroization and FX exposure: - FX deposits account for half of all deposits; FX loans account for 60 percent of total loans. - Banks’ net open FX position is small, but unhedged FX borrowers constitute 25 percent of total loans, posing financial stability risks and a limited capacity as lender of last resort in FX. - BoA announced a comprehensive strategy to reduce the use of foreign currency starting in 2018; staff advised gradual implementation while monitoring FX market impacts. - Specific measures in the de-euroization strategy: - Increase the ratio of FX liquid assets to FX short-term liabilities from 15 to 20 percent. - Increase required reserve ratio for FX deposits from 10 to 12.5 percent. - Reduce required reserve ratio for lek deposits from 10 to 7.5 percent. - Overall required reserves projected to increase slightly in a context where banks have sizable excess reserves. - FX interventions and reserves: - Authorities have been executing limited and pre-announced interventions to build up FX reserve buffers; staff advised interventions remain fully transparent and consistent with achieving the inflation target, limiting deviations to preventing disorderly market conditions. - Government’s planned issuance of external commercial debt (partly to roll over the €450 million Eurobond maturing in 2020) is expected to further boost reserves. - When considering additional external borrowing, staff advised considering its impact on the de-euroization strategy. - Central bank governance: - Staff recommended amending the central bank law to align with best international practices on central bank independence. ### Financial sector stability, supervision, and credit dynamics - Banking system status: - Banking system remains stable, liquid, and well capitalized. - NPL ratio is still high but declining; profits recovering given lower provisioning needs. - Bank lending is financed predominantly with deposits. - Credit deepening remains low by regional standards due to low incomes, large informality, lack of credit scoring, and a weak collateral execution framework. - Market structure and risks: - Market share of EU-owned banks declined from 67 percent in 2013 to 54 percent in mid-2017 due to deleveraging and restructuring of parent banks. - Risks from an abrupt exit or portfolio shift by a large bank to FX and T-bill markets. - Several non-EU banks expanding rapidly, including via non-resident lending to Kosovo and Turkey; requires vigilance for credit risk buildup. - A stock-exchange license recently granted to a group of banks increases interconnectedness in the financial sector. - Supervision and macroprudential policy: - New macroprudential strategy approved with objectives to mitigate excessive credit growth, contain systemic risks and market liquidity issues, limit concentration and excessive risk taking; includes phase-wise strategy for identification, instrument selection/calibration, implementation, communication, and impact evaluation. - Staff recommendations: - Focus on risk-based supervision and higher financial buffers for banks expanding to nonbanking activities. - Close cooperation between supervisors to address interconnectedness risks. - Consider a special external diagnostic review, possibly with a peer supervisor, to assess high-risk portfolios and identify gaps in risk management, focusing on banks with high credit growth. - For cross-border lending vulnerabilities: enhanced screening of these portfolios and increased system-wide risk-based weights and provisioning to account for underlying risks. *International Monetary Fund staff report (excerpts).* ### 35. Staff underscored the need for close communication with EU-owned banks, their ### 35. Staff underscored the need for close communication with EU-owned banks, their parents, and peer supervisors to ensure a smooth bank consolidation ### Bank consolidation and supervision - Staff underscored the need for close communication with EU-owned banks, their parents, and peer supervisors to ensure a smooth bank consolidation. - Staff stressed the need for the regulator to avoid awarding new licensing to inexperienced investors. - Aligning supervision with ECB standards could discourage deleveraging by EU banks. - Staff recommendation: BoA should ensure that candidates for new bank licenses possess adequate banking experience and avoid conflicts of interest. - Staff recommendation: Continue strengthening microprudential focus on the fastest-growing and systemically important segments of the banking system; remain vigilant of risks from growing interconnectedness with the non-banking financial sector; strengthen crisis-preparedness. ### Box 1 — NPL Resolution in Albania: findings and priorities - Current state: - The NPL ratio is declining but remains at 15 percent of loans at end-August. - Decline attributed largely to mandatory write-offs and BoA’s proactive approach in facilitating the resolution of large borrowers’ NPLs. - Banks also restructured loans after sizable haircuts. - NPL sales have been limited due to low expected recovery rates and tax impediments. - Recent developments slowing progress: - Reform of the resolution framework has slowed down; the work of the NPL working group has paused. - A bylaw to the Private Bailiff’s Law was introduced that increased fixed fees paid in advance, thereby disincentivizing the collateral execution process. - Key actions to reduce banks’ risk aversion and improve NPL resolution: - Revise the bylaws regulating bailiffs fees. - Issue the pending bylaws for out-of-court agreements and adopt the new Bankruptcy Law. - Introduce a rating methodology for the credit registry and develop a credit bureau to improve risk assessment of borrowers. - Strictly monitor asset quality and restructured loans to help prevent new NPLs. - Analyze and address tax impediments that prevent NPL sales. - Publish a mid-term progress report on the implementation of the NPL strategy to identify pending issues. - Reactivate the NPL working group to advance the process. - Regulatory capital implication for EU banks: - EU banks face a high capital requirement for their holdings of Albanian government bonds because EU regulations require higher risk weights as Albania’s banking supervision is not considered fully consistent with EU standards. - If Albanian supervision is deemed EU-equivalent, risk weights for Albanian government bonds in local currency could be reduced. ### Nonbank financial sector and markets - Strengthening AFSA capacity is crucial. - The new AFSA management is committed to strengthen its capacity. - Investment funds account for 5 percent of GDP and lack an adequate crisis management framework. - In the absence of a liquid secondary market, the T-bill market has faced substantial price volatility over the past year. - With World Bank support, authorities and market players are piloting longer-dated bonds to improve primary and secondary markets. - Market volatility note: - Pre-election uncertainty and miscommunication among market players, MoF, BoA, and AFSA resulted in a surge in interest rates on domestic T-bills of about 200 basis points in late 2016 that was later reversed. ### AML/CFT framework - Progress and outstanding work: - Albania has strengthened its AML/CFT framework since its 2011 mutual evaluation against the 2003 FATF standard. - Albania is undergoing an evaluation against the revised 2012 FATF standard, which places an important focus on effectiveness. - Further progress is required to comply with the recommendations of the revised standard and ensure the regime effectively mitigates money laundering and predicate offences such as corruption. - Evaluation timeline: - The onsite visit for the 2012-standard evaluation took place in October 2017 and the evaluation report was expected to be adopted in April 2018. ### Authorities’ views (selected) - Bank of Albania (BoA): - Fully committed to maintain supervisory vigilance to preserve financial stability. - Will closely monitor fast-growing or systemically important banks. - Sees limited gains from external diagnostics on high risk portfolios at this stage as NPLs are declining. - Actively communicating with peer supervisors and parent banks to smooth the deleveraging process by EU-owned banks. - Noted limited interest from the banking sector in the region, posing challenges for financial deepening. - Noted planned conversion of large branches of Albanian banks overseas to subsidiaries. - Has started implementing the new bank resolution framework aligned with the BRRD requirements. - AFSA: - Committed to strengthen capacity through new hiring and continuous training. - Will conduct stress tests and a crisis preparedness exercise for investment funds. - Preparing regulations on conflicts of interest and related parties, liquidity requirements, and equity and bond trading. ### Staff appraisal: key policy recommendations (selected) - Macroeconomic and fiscal: - Continue fiscal consolidation to rebuild room for fiscal policy maneuver and ensure debt sustainability. - Consider a more ambitious and front-loaded consolidation path than currently envisioned to reach the authorities’ commitment of reducing public debt below 60 percent of GDP by 2021. - Mobilize revenues to support consolidation and priority spending; planned introduction of a value-based property tax and strengthening tax compliance are welcome but should be carefully planned and sequenced. - Refrain from lowering tax rates or granting any new tax exemptions or preferential tax treatments. - Consider additional revenue measures, including broadening the tax base. - Fiscal institutions and public investment: - Strengthen fiscal institutions to mitigate fiscal risks and enhance efficiency. - Revisit the announced merger of the tax and customs administrations given risks to revenue collection and ongoing tax administration reforms. - Public debt management should focus on lengthening maturity and diversifying investor base while avoiding excessive non-concessional FX borrowing. - Strengthen public investment management: project appraisal and monitoring; ensure PPPs are assessed and monitored; reflect PPP impact transparently in fiscal accounts. - Improve VAT refund process, strengthen commitment controls, and extend coverage of the Treasury’s IT system to minimize recurrence of arrears. - Financial sector and NPLs: - Reverse the recent regulation on private bailiff fees that is likely to hinder the collateral execution process. - Urgently adopt bylaws to implement the new Bankruptcy Law and facilitate out-of-court restructuring. - Continue efforts to shore up financial supervision and strengthen crisis-preparedness. - Ensure candidates for new bank licenses have adequate banking experience and avoid conflicts of interest. - Develop capital market institutions with high transparency and governance standards. - Electricity sector and SOEs: - Resume and accelerate reforms in the state-owned electricity sector: advance financial restructuring, improve operational efficiency, strengthen corporate governance, resume publication of financial statements. - Accelerate institutional and market reforms: establish a power exchange, unbundle the electricity distribution company, move medium-voltage customers to the free market, make tariff adjustments more frequent and automatic. - Diversify sources of electricity in light of drought-induced fall in hydropower generation. - Monetary policy and de-euroization: - BoA’s accommodative monetary policy stance remains appropriate. - Any unwinding of monetary easing should await clear evidence of a sustained rise in inflation. - Implement de-euroization strategy gradually. - Amend the central bank law to align with modern central banking legislation. - Structural reforms and labor market: - Encourage labor participation, especially among women and youth, by investing further in skills and vocational training. - Advance judicial reform, property rights reform, and anti-corruption efforts to improve the business climate, reduce informality, and deepen financial markets. *International Monetary Fund — cr17373 (excerpt).* ### 58. It is recommended that the next Article IV consultation be held on the standard ### It is recommended that the next Article IV consultation be held on the standard 12-month cycle. Meanwhile, Albania will remain under Post-Program monitoring. ### Recommendation and Surveillance - Recommendation: next Article IV consultation on the standard 12-month cycle. - Monitoring status: Albania will remain under Post-Program monitoring. ### Real Sector: Growth and Inflation - Real GDP growth (annual percent): 2013: 1.0; 2014: 1.8; 2015: 2.2; 2016: 3.4; 2017 (Prel.): 3.9; 2018 (Proj.): 3.7; 2019 (Proj.): 3.8; 2020 (Proj.): 3.9; 2021 (Proj.): 3.9; 2022 (Proj.): 4.0. - Domestic demand contribution to growth (percent): 2013: 0.4; 2014: 3.3; 2015: 0.6; 2016: 3.1; 2017 (Prel.): 4.0; 2018 (Proj.): 3.0; 2019 (Proj.): 3.6; 2020 (Proj.): 4.0; 2021 (Proj.): 4.2; 2022 (Proj.): 4.3. - Investment (incl. Inventories+stat. disc.) contribution (percent): 2013: -1.3; 2014: 0.3; 2015: -0.2; 2016: 0.4; 2017 (Prel.): 1.8; 2018 (Proj.): 1.1; 2019 (Proj.): 1.4; 2020 (Proj.): 1.8; 2021 (Proj.): 1.8; 2022 (Proj.): 1.8. - External demand contribution (percent): 2013: 0.6; 2014: -1.5; 2015: 1.6; 2016: 0.3; 2017 (Prel.): -0.1; 2018 (Proj.): 0.7; 2019 (Proj.): 0.1; 2020 (Proj.): -0.1; 2021 (Proj.): -0.3; 2022 (Proj.): -0.3. - Consumer Price Index (avg., year-on-year percent): 2013: 1.9; 2014: 1.6; 2015: 1.9; 2016: 1.3; 2017 (Prel.): 2.1; 2018 (Proj.): 2.8; 2019 (Proj.): 3.0; 2020 (Proj.): 3.0; 2021 (Proj.): 3.0; 2022 (Proj.): 3.0. - Output gap (percent): 2013: -0.7; 2014: -1.2; 2015: -1.6; 2016: -1.2; 2017 (Prel.): -0.6; 2018 (Proj.): -0.4; 2019 (Proj.): -0.2; 2020 (Proj.): 0.0; 2021 (Proj.): 0.1; 2022 (Proj.): 0.1. ### Fiscal Sector: Revenues, Expenditure, Balances, Debt - Total revenue and grants (percent of GDP): 2013: 24.0; 2014: 26.3; 2015: 26.4; 2016: 27.4; 2017 (Prel.): 28.2; 2018 (Proj.): 28.1; 2019 (Proj.): 27.9; 2020 (Proj.): 27.8; 2021 (Proj.): 27.5; 2022 (Proj.): 27.2. - Tax revenue (percent of GDP): 2013: 22.0; 2014: 24.1; 2015: 23.9; 2016: 24.9; 2017 (Prel.): 25.9; 2018 (Proj.): 25.6; 2019 (Proj.): 25.5; 2020 (Proj.): 25.4; 2021 (Proj.): 25.2; 2022 (Proj.): 24.9. - Total expenditure (percent of GDP): 2013: 29.2; 2014: 32.2; 2015: 31.0; 2016: 29.6; 2017 (Prel.): 30.2; 2018 (Proj.): 29.9; 2019 (Proj.): 29.7; 2020 (Proj.): 29.4; 2021 (Proj.): 29.3; 2022 (Proj.): 29.2. - Overall balance (percent of GDP): 2013: -5.2; 2014: -5.9; 2015: -4.6; 2016: -2.3; 2017 (Prel.): -2.0; 2018 (Proj.): -1.9; 2019 (Proj.): -1.8; 2020 (Proj.): -1.6; 2021 (Proj.): -1.8; 2022 (Proj.): -2.0. - Primary balance (percent of GDP): 2013: -2.0; 2014: -3.0; 2015: -1.9; 2016: 0.2; 2017 (Prel.): 0.1; 2018 (Proj.): 0.4; 2019 (Proj.): 0.6; 2020 (Proj.): 0.9; 2021 (Proj.): 0.9; 2022 (Proj.): 0.8. - Financing (percent of GDP): 2013: 5.2; 2014: 5.9; 2015: 4.6; 2016: 2.3; 2017 (Prel.): 2.0; 2018 (Proj.): 1.9; 2019 (Proj.): 1.8; 2020 (Proj.): 1.6; 2021 (Proj.): 1.8; 2022 (Proj.): 2.0. - General government debt (percent of GDP) 2/: 2013: 70.4; 2014: 72.0; 2015: 74.1; 2016: 73.3; 2017 (Prel.): 71.5; 2018 (Proj.): 71.3; 2019 (Proj.): 68.7; 2020 (Proj.): 66.7; 2021 (Proj.): 64.0; 2022 (Proj.): 62.2. - Domestic debt (percent of GDP): 2013: 43.4; 2014: 42.4; 2015: 39.7; 2016: 39.0; 2017 (Prel.): 35.3; 2018 (Proj.): 31.5; 2019 (Proj.): 30.0; 2020 (Proj.): 28.3; 2021 (Proj.): 27.7; 2022 (Proj.): 28.0. - External debt (percent of GDP): 2013: 27.0; 2014: 29.6; 2015: 34.4; 2016: 34.4; 2017 (Prel.): 36.2; 2018 (Proj.): 39.8; 2019 (Proj.): 38.7; 2020 (Proj.): 38.3; 2021 (Proj.): 36.3; 2022 (Proj.): 34.2. - Key fiscal composition notes: - VAT (percent of GDP): 2013: 8.0; 2014: 8.9; 2015: 8.7; 2016: 8.7; 2017 (Prel.): 9.0; 2018 (Proj.): 8.8; 2019 (Proj.): 8.7; 2020 (Proj.): 8.7; 2021 (Proj.): 8.6; 2022 (Proj.): 8.6. - Interest payments (percent of GDP): 2013: 3.2; 2014: 2.9; 2015: 2.7; 2016: 2.5; 2017 (Prel.): 2.1; 2018 (Proj.): 2.2; 2019 (Proj.): 2.4; 2020 (Proj.): 2.5; 2021 (Proj.): 2.7; 2022 (Proj.): 2.8. ### External Sector: Current Account, Reserves, Financing - Current account balance (percent of GDP): 2013: -9.3; 2014: -10.8; 2015: -8.6; 2016: -7.6; 2017 (Prel.): -8.0; 2018 (Proj.): -7.1; 2019 (Proj.): -6.9; 2020 (Proj.): -6.7; 2021 (Proj.): -6.5; 2022 (Proj.): -6.3. - Trade balance (goods and services, percent of GDP): 2013: -18.0; 2014: -19.0; 2015: -17.3; 2016: -16.9; 2017 (Prel.): -16.5; 2018 (Proj.): -15.4; 2019 (Proj.): -14.8; 2020 (Proj.): -14.2; 2021 (Proj.): -13.8; 2022 (Proj.): -13.4. - Exports (percent of GDP): 2013: 11.1; 2014: 9.3; 2015: 7.5; 2016: 6.6; 2017 (Prel.): 7.0; 2018 (Proj.): 7.3; 2019 (Proj.): 7.4; 2020 (Proj.): 7.5; 2021 (Proj.): 7.5; 2022 (Proj.): 7.6. - Imports (percent of GDP): 2013: 31.5; 2014: 31.6; 2015: 30.0; 2016: 30.9; 2017 (Prel.): 31.1; 2018 (Proj.): 30.7; 2019 (Proj.): 30.5; 2020 (Proj.): 30.3; 2021 (Proj.): 30.3; 2022 (Proj.): 30.4. - Gross international reserves (in billions of Euros): 2013: 2.0; 2014: 2.2; 2015: 2.9; 2016: 2.9; 2017 (Prel.): 2.9; 2018 (Proj.): 3.2; 2019 (Proj.): 3.0; 2020 (Proj.): 3.2; 2021 (Proj.): 3.2; 2022 (Proj.): 3.3. - Reserves in months of imports of goods and services: 2013: 5.1; 2014: 5.8; 2015: 7.0; 2016: 6.6; 2017 (Prel.): 6.2; 2018 (Proj.): 6.5; 2019 (Proj.): 5.9; 2020 (Proj.): 5.9; 2021 (Proj.): 5.6; 2022 (Proj.): 5.5. - Balance of Payments highlights (percent of GDP): direct investment, net: 2013: 9.5; 2014: 8.1; 2015: 8.0; 2016: 8.7; 2017 (Prel.): 9.4; 2018 (Proj.): 8.5; 2019 (Proj.): 7.0; 2020 (Proj.): 6.5; 2021 (Proj.): 6.4; 2022 (Proj.): 6.5. - External financing composition (selected items, million Euros, 2014–22 totals in Table 4): - Foreign direct investment, net: 2014: 812; 2015: 818; 2016: 936; 2017: 1,084; 2018 (Proj.): 1,029; 2019 (Proj.): 893; 2020 (Proj.): 876; 2021 (Proj.): 925; 2022 (Proj.): 1,003. ### Monetary and Financial Sector - Broad money growth (year change, percent): 2013: 2.3; 2014: 4.0; 2015: 1.8; 2016: 3.9; 2017 (Prel.): 4.3; 2018 (Proj.): 5.9; 2019 (Proj.): 6.1; 2020 (Proj.): 6.5; 2021 (Proj.): 6.6; 2022 (Proj.): 6.6. - Private credit growth (year change, percent): 2013: -1.4; 2014: 2.0; 2015: -2.8; 2016: 0.4; 2017 (Prel.): 0.9; 2018 (Proj.): 4.2; 2019 (Proj.): 5.6; 2020 (Proj.): 6.2; 2021 (Proj.): 6.3; 2022 (Proj.): 6.3. - Bank-of-Albania summary (selected, end-period, billion Lek): - Net foreign assets: 2013: 274; 2014: 292; 2015: 363; 2016: 390; 2017 (Prel.): 380; 2018 (Proj.): 429; 2019 (Proj.): 414; 2020 (Proj.): 440; 2021 (Proj.): 446; 2022 (Proj.): 453. - Reserve money (end-period, billion Lek): 2013: 308; 2014: 333; 2015: 384; 2016: 414; 2017 (Prel.): 417; 2018 (Proj.): 428; 2019 (Proj.): 442; 2020 (Proj.): 455; 2021 (Proj.): 474; 2022 (Proj.): 494. - Banking sector soundness (financial soundness indicators, selected): - Regulatory capital as percent of risk-weighted assets (Dec-16): 15.8; (Mar-17): 16.3; (Jun-17): 16.4; (Sep-17): 16.4. - Nonperforming loans (gross) as percent of total loans (Dec-16): 18.3; (Mar-17): 16.4; (Jun-17): 14.8; (Sep-17): 14.8. - Return on equity (annual basis, selected): Dec-16: 16.6; Mar-17: 16.7; Jun-17: 16.3. ### Social, Structural, and Labor Indicators - Social spending: indicators show low social spending and limited spending on higher education relative to peers (charts and indices provided). - Labor market: - Unemployment rate (percent): Albania series shows decline with 2016 and 2017 improvement (charted). - Labor force participation (percent, 15–64): Albania around high 50s to low 70s in time series (charted). - Demographics: share of working age population projected to decline; population aging and persistent emigration highlighted. - Inclusiveness: - Youth unemployment remains very high; youth activity rate has declined. - Informal employment share and shadow economy size: Albania shows relatively large and increasing informality. - Financial inclusion: share of adults with an account lags regional peers (charts provided). ### Key Risks and Policy Implications (as presented) - Fiscal risks: although public debt has declined from peak, it remains large; gross financing needs have declined but remain sizable; government cash buffers are relatively low (charts and tables). - External risks: current account deficits remain sizable though improving; FX reserves projected to remain around 2.9–3.3 billion Euros over 2017–22. - Monetary/financial risks: high euroization and large unhedged FX exposures; NPLs remain high but are adequately provisioned; banks maintain sizable liquidity buffers. - Structural constraints: corruption, weaknesses in judicial efficiency and property rights, and infrastructure gaps—especially electricity reliability—are key barriers to investment. _Italic line: Source: IMF staff estimates and projections as presented in the Albania staff report tables and figures._ ### Annex I. Albania: External Sector Assessment ### Annex I. Albania: External Sector Assessment ### External position and current account - The external position is moderately weaker than implied by fundamentals and desirable policy settings (EBA-Lite). - Current account developments: - Current account deficit declined to 7.6 percent of GDP at end-2016, the lowest level over the past decade. - Trade deficit at 16.9 percent of GDP in 2016. - Imports tied to FDI in large energy projects (especially the Trans-Adriatic Pipeline (TAP)) contributed around 2.5 percent of GDP in 2016. - Net FDI in 2016: 8.7 percent of GDP, covering over 100 percent of the CA deficit. - Exchange rate and competitiveness: - Since the beginning of 2016, the CPI and PPI-based REERs have both appreciated by about 7 percent, reflecting an appreciation of the NEER and price differentials vis-à-vis trading partners. - EBA-Lite indicates a REER overvaluation of about 6 percent. ### External balance, stocks, and sustainability - Net international investment position (NIIP): - NIIP worsened to -45 percent of GDP in 2016 from -36 percent of GDP in 2013. - Foreign liabilities reached 110 percent of GDP, with nearly half comprising non-debt creating FDI liabilities; other liabilities mainly comprise long term concessional public debt. - External financing and reserves: - External financing needs at 13.4 percent of GDP in 2016. - Gross FX reserves at 27 percent of GDP at end-2016. - FX reserves reached 173 percent of the ARA metric in 2016 (above the 150 percent upper threshold for floating regimes). - Reserve coverage is projected to increase in the medium-term and decline thereafter as de-euroization plans gain momentum and FX debt is repaid; expected to remain above the upper boundary of the ARA over the medium-term. - Medium-term outlook: - As FDI in large energy projects tapers off, the CA deficit is projected to narrow correspondingly and the rate of growth of the NIIP deficit is expected to slow. ### EBA-Lite and external assessment results (exact figures) - EBA-Lite (Current account approach): - Current account norm: -4.9 (percent of GDP) - Adjusted actual current account: -6.0 (percent of GDP) - Current account gap: -1.0 (percent of GDP) - REER gap: 6.1 - External sustainability approach: - Current account norm: -4.4 (percent of GDP) - Adjusted actual current account: -6.4 (percent of GDP) - Current account gap: -2.0 (percent of GDP) - REER gap: 9.5 - REER approach: - n.a. for current account norm, adjusted actual, and current account gap - REER gap: -1.0 - REER elasticity: -0.17 - Interpretation: - The CA gap of -1.0 percent of GDP (EBA-Lite current account approach) suggests a REER overvaluation of about 6 percent and an external position moderately weaker than implied by fundamentals and desirable policy settings. - The ES approach likewise indicates a moderately weaker external position. ### Competitiveness and structural constraints - Export structure and competitiveness: - Despite cost competitiveness, exports are narrowly concentrated in a few low-value added sectors (commodities and low value-added textiles). - New investments in the non-energy tradable sector are limited. - Structural impediments to export competitiveness: weak institutions, deficiencies in infrastructure, an excessively complex tax system, access to finance, and a shortage of skilled labor. - Wages are low, but productivity is also low. - Policy priorities to strengthen external position and competitiveness: - Complete key infrastructure projects to reduce transportation costs. - Address energy sector reliability. - Increase domestic savings. - Improve governance and the rule of law. - Raise labor market efficiency by reducing skills shortages. ### Key statistics and medium-term risks - Selected exact figures: - Current account deficit (end-2016): 7.6 percent of GDP - Trade deficit (2016): 16.9 percent of GDP - TAP-related imports contribution (2016): around 2.5 percent of GDP - NIIP (2016): -45 percent of GDP - NIIP (2013): -36 percent of GDP - Foreign liabilities: 110 percent of GDP - External financing needs (2016): 13.4 percent of GDP - Gross FX reserves (end-2016): 27 percent of GDP - FX reserves relative to ARA (2016): 173 percent of the ARA metric - Net FDI (2016): 8.7 percent of GDP - Public debt (end-2016): 73.3 percent of GDP (from DSA background) - Projected public debt (2021, baseline): about 64 percent of GDP - Debt and rollover risks: - Public debt remains high and poses significant risks despite fiscal adjustment; rollover needs remain sizable. - Heavy reliance on the banking sector (which held 60 percent of domestic public debt at end-2016) poses systemic links between commercial banks and the sovereign. *Source: IMF staff calculations and Annex I. Albania: External Sector Assessment* ### 5. Public debt under the baseline scenario is susceptible to a range of risks arising from ### 5. Public debt under the baseline scenario is susceptible to a range of risks arising from ### Baseline risks from financing composition - About two-fifths of central government domestic direct debt was short-term at the end of 2016. - The short-term share is expected to decline only gradually over time. - Public gross financing needs are projected to remain well above the 15 percent of GDP early warning threshold associated with past debt crises. - Interest rate risk is expected to increase with the lengthening of maturities. - Lack of a liquid secondary market and commercial banks’ preference to hold government securities till maturity limit somewhat the impact on valuations. - Increasing share of external donor financing mitigates some financing risks. - Exchange rate risk will rise with the expansion of foreign currency debt, but Albania’s comfortable level of international reserves should alleviate the risk of a large disorderly devaluation. ### Alternative scenarios and vulnerability if reforms falter - Key risks arise from a slower-than-projected fiscal adjustment and growth recovery. - Under the scenario based on historical performance, by 2022 public debt would be around 77 percent of GDP. - Under the same scenario, gross financing needs would be just over 30 percent of GDP in 2022. - Note on scenarios: Under the historical scenario, real GDP growth, the primary balance, and real interest rates are set at their historical average of the past 10 years, while other variables are the same as in the baseline. Under the constant primary balance scenario, the primary balance remains at the 2017 projected level (in percent of GDP), while all other variables are the same as in the baseline. ### Reasons the baseline scenario is considered realistic - Limited validity of the historical scenario: The historical performance of the past 10 years is not representative of the current policy environment. The current government, which took office in 2013 and was re-elected in 2017, has engineered a clear break with past policies. Since 2014, the government has successfully embarked on fiscal consolidation and accompanying reforms, including of fiscal institutions. - Authorities remain committed to gradually reducing the public debt (by improving the primary balance over the medium term) and accelerating growth (by implementing further structural reforms). - Reasonably good forecast record: - Forecasts for growth do not suffer from a large systematic bias, with forecast errors close to the panel average. - Forecasts for the primary balance have been too pessimistic, with a percentile rank of 85 percent. - Inflation forecasts have been too optimistic, with a percentile rank of 16 percent. - The planned fiscal effort is somewhat larger than what is typical of other countries’ adjustment experiences, but this also reflects substantial arrears clearance, which worsened the fiscal balance in 2014–2015. - GDP forecasts in line with fundamentals, given: - Albania’s relatively low per capita income by regional standards and its potential for convergence; - High inflows of FDI throughout the period; - The imminent launch of EU accession negotiations, which should foster further growth-friendly structural reforms; - The authorities’ strong record of implementing difficult reforms. ### Stress tests — public debt - Macroeconomic and fiscal shocks can significantly increase public debt and gross financing needs relative to the baseline throughout the projection period. - Albania shows the highest vulnerability to a combined macro-fiscal shock. - Under the combined macro-fiscal shock, the debt-to-GDP ratio increases to 81 percent in 2019, before gradually declining to around 78 percent by 2022. - Gross financing needs would stabilize around 27–29 percent of GDP by the end of the forecast horizon. - Second worst-case scenario: a growth shock. - Following a negative shock in real GDP growth by one standard deviation in 2018–2019, public debt would still be just under 68 percent of GDP in 2022. - Fan charts simulations: - Under a symmetric distribution, an 80 percent confidence interval for the debt stock in 2022 ranges between 54 and 70 percent of GDP. - Under a restricted distribution (which precludes positive shocks to the primary balance), debt could be above 70 percent of GDP by 2022 with a probability of almost 25 percent, relative to the baseline scenario of 62 percent of GDP. - Note on stress tests: Stress tests include shocks to macro variables (real interest rate, real GDP growth, real exchange rate), fiscal variables (primary balance), and a combination of macro and fiscal variables which incorporates the largest effect of individual shocks on all variables. Fan charts show a spectrum of possible outcomes for the level of debt based on a probabilistic view of uncertainty around the baseline. ### External debt sustainability - The external debt-to-GDP ratio and nominal interest rates on external debt have been revised upwards compared to the last DSA (May 2016). - Revisions result from a downward adjustment to nominal GDP in U.S. dollars and the conversion to BPM6. - Most external debt continues to be held by multilateral creditors and bilateral development agencies. - Most foreign public debt is denominated in euros (inter-government loans and the Eurobond), followed by SDRs (IMF loans). - External debt path projections: - External public borrowing will drive total external debt to peak around 66 percent of GDP in 2018 before declining to 55 percent by 2022. - External private borrowing is expected to decline from about 28 to 22 percent of GDP. - Accumulation of FDI-related debt liabilities will slow as investment in large energy projects (such as the Trans Adriatic Pipeline) tapers off, but such liabilities will likely remain the largest component of the private external debt stock. - Public and private external debt service is expected to rise gradually through the medium-term, increasing to 11 percent of GDP in 2020 as the €450 million 2015 Eurobond issuance is amortized. - The authorities expect to roll over this debt and accrue new debt via increased commercial borrowing in the medium-term. - External debt stress tests: - Under a 30 percent exchange rate depreciation shock, external debt would peak at 100 percent of GDP in 2018 before declining to 84 percent by 2022. - Following a shock to the current account of half a standard deviation (around 2½ percent of GDP), external debt would peak at 68 percent of GDP in 2018 and gradually decline to 63 percent by 2022. - Depreciation shocks are likely to have added significance for debt dynamics in view of increased commercial borrowing, although Albania’s ample reserve buffers should help mitigate disorderly foreign exchange market conditions. ### Conclusion and risk assessment - Despite the significant fiscal adjustment since 2014, Albania’s debt remains high and poses significant risks. - In the standardized heat map: - Albania’s debt and gross financing needs are above relevant thresholds under the baseline (highlighted in red). - The share of short-term debt has been declining (green in the heat map). - The debt profile shows moderate risks with key indicators above the lower risk-assessment benchmark (yellow in the heat map). - Risks are mitigated somewhat by the fact that external donors hold a significant share of the public debt portfolio. *International Monetary Fund — Selected excerpts from the Albania debt sustainability analysis (cr17373).* ### 14. Addressing the risks associated with high debt remains critical for Albania’s ### 14. Addressing the risks associated with high debt remains critical for Albania’s ### Key message: debt risks and recommended policy actions - High debt may thwart the economic recovery and raises vulnerability to shocks, increased rollover requirements, and higher exposure to sudden shifts in market perception. - Recommended policy actions: - Continue to strengthen debt management capacity and lengthen debt maturity. - Continue fiscal consolidation. - Steadfast implementation of structural reforms to ensure debt sustainability. ### Public DSA — baseline indicators and projections (as presented) - Nominal gross public debt (row as presented): 60.774.173.371.571.368.766.764.062.2 - Public gross financing needs (row as presented): 40.741.028.325.725.623.722.821.022.05 - Real GDP growth (in percent, row as presented): 3.72.23.43.93.73.83.93.94.0 - Inflation (GDP deflator, in percent, row as presented): 2.60.1-0.22.12.32.52.82.82.8 - Nominal GDP growth (in percent, row as presented): 6.42.33.26.16.16.46.86.96.8 - Effective interest rate (in percent, row as presented): 5.84.13.63.23.23.54.14.34.7 - Change in gross public sector debt (cumulative, row as presented): 1.52.1-0.7-1.8-0.2-2.6-2.0-2.7-1.8-11.1 - Identified debt-creating flows (row as presented): 1.91.40.3-1.8-0.4-2.9-1.9-2.7-1.9-11.6 - Primary deficit (in percent of GDP, row as presented): 1.41.9-0.2-0.1-0.4-0.6-0.9-0.9-0.8-3.7 - Primary revenue and grants (in percent of GDP, row as presented): 25.726.427.428.228.127.927.827.527.2166.7 - Primary expenditure (in percent of GDP, row as presented): 27.128.327.228.127.727.326.926.626.4163.0 - Automatic debt dynamics (row as presented): 0.31.70.1-2.0-2.0-1.9-1.7-1.6-1.3-10.5 - Residual (row as presented): -0.40.7-1.10.00.20.2-0.10.00.10.5 - Sovereign spread (bp) (as noted): Spread (bp) 3/197 - Credit rating statement (as noted): Credit rating for short-term foreign and local currency sovereign debt is maintained at "B." ### Public DSA — alternative scenarios (underlying assumptions presented) - Baseline underlying assumptions (selected rows as presented): - Baseline Real GDP growth (2017-2022): 3.9 3.7 3.8 3.9 3.9 4.0 - Baseline Inflation (2017-2022): 2.1 2.3 2.5 2.8 2.8 2.8 - Baseline Primary Balance (2017-2022): 0.1 0.4 0.6 0.9 0.9 0.8 - Baseline Effective interest rate (2017-2022): 3.2 3.2 3.5 4.1 4.3 4.7 - Historical scenario (selected rows as presented): - Real GDP growth (2017-2022): 3.9 3.3 3.3 3.3 3.3 3.3 - Primary Balance (2017-2022): 0.1 -1.4 -1.4 -1.4 -1.4 -1.4 - Effective interest rate (2017-2022): 3.2 3.2 4.2 4.9 5.4 5.9 - Constant Primary Balance Scenario (selected rows as presented): - Primary Balance (2017-2022): 0.1 0.1 0.1 0.1 0.1 0.1 ### Stress tests (structure and selected scenario results as presented) - Stress tests included: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Macro-Fiscal Shock; Additional stress tests. - Examples of scenario parameter values presented: - Baseline Real GDP growth (2017-2022): 3.9 3.7 3.8 3.9 3.9 4.0 - Primary Balance Shock — Primary balance (2017-2022): 0.1 -0.3 -0.1 0.9 0.9 0.8 - Real GDP Growth Shock — Real GDP growth (2017-2022): 3.9 1.7 1.7 3.9 3.9 4.0 - Real Interest Rate Shock — Effective interest rate (2017-2022): 3.2 3.2 4.8 5.8 6.4 7.1 - Real Exchange Rate Shock — Inflation (2017-2022): 2.1 5.7 2.5 2.8 2.8 2.8 - Combined Shock — Primary balance (2017-2022): 0.1 -1.0 -1.5 0.9 0.9 0.8 - Stress test outputs are presented in charts for Gross Nominal Public Debt (percent of GDP), Gross Nominal Public Debt (percent of Revenue), and Public Gross Financing Needs (percent of GDP) under baseline and shocks (charts as presented). ### External debt sustainability (Table 1 and bound tests — key rows as presented) - Baseline: External debt (row as presented for 2012-2022): 51.660.556.163.362.066.066.263.862.058.655.4-7.1 - Change in external debt (row as presented): 18.38.8-4.47.3-1.44.00.2-2.4-1.8-3.4-3.1 - Identified external debt-creating flows (row as presented): 4.9-2.10.510.1-4.0-3.5-3.5-2.4-2.2-2.2-2.4 - Current account deficit, excluding interest payments (row as presented): 9.48.99.57.06.06.04.84.44.13.83.7 - Net non-debt creating capital inflows (row as presented): -6.8-9.5-8.1-8.0-8.7-8.8-7.7-6.3-5.8-5.7-5.9 - Automatic debt dynamics (row as presented): 2.3-1.5-0.811.0-1.2-0.6-0.6-0.6-0.4-0.3-0.2 - External debt-to-exports ratio (row as presented): 154.4209.1198.7231.2213.9221.5217.1206.5199.0186.4174.4 - Gross external financing need (in billions of US dollars, row as presented): 1.51.72.22.01.61.81.81.92.42.02.0 - Key macro assumptions (selected as presented): - Real GDP growth (2012-2022 row as presented): 1.41.01.82.23.43.32.13.93.73.83.93.94.0 - Nominal external interest rate (in percent, row as presented): 2.20.82.32.52.72.20.72.82.62.83.23.43.5 - Bound tests: Figures present the evolution of external debt (percent of GDP) under interest rate shocks, current account shocks, growth shocks, combined shocks and a 30 percent real depreciation (charts as presented). Selected scenario labels and numbers in boxes are shown in those charts (as presented). ### Medium-term growth (Annex V — highlights and numeric entries as presented) - Drivers and constraints: - Growth acceleration since 2015 driven by higher FDI, regional recovery, and rising consumer confidence. - Potential growth estimated to have increased from 2.3 percent in 2013 to 3.2 percent in 2016. - End of large FDI projects, low savings, and demographic pressures expected to weigh on medium-term growth. - Institutional reforms from the EU accession process can improve productivity and potential growth. - Empirical estimates of convergence suggest Albania’s growth should be around 4 percent. - Impact of Trans Adriatic Pipeline (TAP) and Statkraft FDI on economic growth (table as presented, percent of GDP and effect on GDP growth): - FDI related to TAP/Statkraft (Percent of GDP, row as presented): 0.8 2.7 3.8 3.8 2.3 0.8 0.0 - of which imports (row as presented): 0.5 1.9 2.7 2.6 1.5 0.4 0.0 - of which domestic expenditure (row as presented): 0.3 0.8 1.2 1.2 0.7 0.3 0.0 - Effect on GDP growth (row as presented): 0.3 0.5 0.3 0.1 -0.5 -0.4 -0.3 - Growth accounting (chart presented) shows contributions (Human capital contribution; Labor contribution; Capital contribution; TFP contribution; Total growth) over 1998–2022 (chart as presented). *Source: IMF staff (figures, tables, and text as presented in the content unit).* ### Annex VI. Fiscal Anchor for Albania ### Annex VI. Fiscal Anchor for Albania ### Current fiscal framework — assessment - Albania’s fiscal framework is based on a medium-term debt objective of 45 percent of GDP. - The current framework "comes short of establishing an operational guidepost" and is operationally insufficient and procyclical, because the Organic Budget Law (OBL) merely requires budgets to target a lowering in the debt ratio. - The 45 percent of GDP debt target is described as adequate given past macroeconomic volatility and the need to maintain sufficient safety margins below a stress level threshold of 60 percent of GDP. - Literature cited indicates that for countries like Albania the optimal level of debt lies around 40–50 percent of GDP, even considering positive growth impact of debt-financed infrastructure, health, and education spending. ### Recommended fiscal anchor: primary balance excluding one-offs - Primary balance (excluding large one-offs) is recommended as the anchor because it: - Is more operational and less susceptible to macroeconomic revisions. - Can be monitored during both budget preparation and execution phases. - Quantified recommendation: - A primary surplus target (excluding one-offs) of 1.5 percent of GDP would: - Bring the debt ratio to below 60 percent of GDP by 2021. - Bring the debt ratio to 45 percent of GDP by 2026. - Additional monitoring: - Given Albania’s goal towards EU accession, structural balance should also be monitored. - Definition (from source footnote): - One-offs are measures having a transitory budgetary effect that does not affect the intertemporal position (e.g., sales of nonfinancial assets or publicly owned licenses, natural disasters costs, and tax amnesties). ### Institutional and implementation needs - The primary-balance anchor alone does not address: - Significant revenue forecasting bias, quantified at 1.8 percent of GDP on average. - Potential reallocation of public spending towards less efficient spending. - Required accompanying measures: - Improvements in public financial management and forecasting. - A simple primary balance rule to correct time inconsistencies, particularly in good times. - Strengthened fiscal reporting. - Possibly an authority in charge of enforcement — a fiscal council — to support implementation. ### Safe debt level (stochastic simulation summary) - IMF staff calculations (stochastic simulations for macro and fiscal shocks with a fiscal reaction function responding to the cycle and trying to bring debt back to 45 percent) indicate: - The safe level of debt-to-GDP ratio that would provide enough buffers for Albania to face 95 percent of shocks without breaching a debt ceiling of 60 percent is around 45 percent. - Visual/simulation details (as described): - Color bands represent deciles, except for the lightest green ones, which are the 5th and 95th percentiles. *Source: Annex VI. Fiscal Anchor for Albania — IMF staff report content provided in the source document.* ### 1. The Republic of Albania has been a member of the World Bank Group (WBG) since ### cr17373 - 1. The Republic of Albania has been a member of the World Bank Group (WBG) since ### WBG engagement and financing - Albania has been a WBG member since 1991. - WBG support provided: - 88 IDA, IBRD, and GEF projects totaling US$2.07 billion. - IFC investments totaling US$490 million. - MIGA guarantees totaling US$8.6 million. - Emphasis: improving quality of the active portfolio with increasing focus on long-term capacity development and implementation through government structures. ### National Strategy for Development and Integration (NSDI) 2015–2020 - NSDI approved in 2016. - Six priorities identified: - (i) achieving European Union (EU) membership; - (ii) consolidating good governance, democracy, and the rule of law; - (iii) ensuring growth through macroeconomic and fiscal stability; - (iv) ensuring growth through increased competitiveness and innovation; - (v) investing in people and social cohesion; - (vi) ensuring growth through connectivity, the sustainable use of resources, and territorial development. - EU integration: overarching goal. - Good governance, democracy, and rule of law: foundation for all other areas. - Other four priorities: pillars under which reforms are to be implemented. ### World Bank Group Country Partnership Framework (CPF) for 2015–19 - CPF supports the NSDI by focusing on three main areas: - (i) restoring macroeconomic balance; - (ii) creating conditions for accelerated private sector growth; - (iii) strengthening public sector management and service delivery. - Two cross-cutting themes: gender equity and the EU accession process as a long-term policy anchor. - CPF operational priorities and targets: - Accelerate implementation of ongoing program while selectively introducing new IBRD lending in strategic areas. - Increase IFC financing for the private sector to US$150–250 million. - Strengthen partnerships with other IFIs and donors. - Expand knowledge program through regional and national activities. - IBRD indicative financing up to US$1.2 billion is proposed in support of the FY2015–FY2019 CPF program, with significant frontloading. ### Current portfolio and implementation performance - Current portfolio size: US$615 million across 10 projects. - Implementation challenges: - Chronic public sector weaknesses, including procurement issues, have slowed project implementation. - Disbursement ratios: - 11 percent in FY2016. - about 7 percent in FY2017. - approximately 4.5 percent at end of Q1 of FY18. - Anticipated high disbursement ratio for the FY (15 percent or more) compared to previous years. - Management response: - High-level portfolio reviews during FY2017; the last took place at the end of February 2017 chaired by the Minister of Finance. - Acceleration in project implementation anticipated due to recent progress in completing procurement actions for large projects. ### Bank–Fund Joint Management Action Plan Matrix (highlights, As of October 2017) - The World Bank’s work program (selected items with provisional timing of missions and expected delivery dates): - Strengthening AFSA’s Supervisory Capacities — October 2017 — March 2019. - Strengthening Institutions for Municipal Service Delivery — October 2017 — September 2018. - Policy Support for the Water Supply and Sanitation Sector — December 2017 — August 2018. - Fiscal DPL — December 2017 — June 2018. - Remittances and Payments — n.a. — June 2018. - Promoting Fiscal Transparency and Enhancing Fiscal Surveillance of Subnational Spending — November 2017 — June 2018. - Integrated Land Management and Geospatial Infrastructure — December 2017 — May 2018. - Additional Financing for Social Assistance Modernization Project — November 2017 — March 2018. - Connectivity of Regional and Local Roads — October 2017 — March 2018. - Implementation Support for the Power Exchange — October 2017 — January 2018. - Water and Irrigation Project — November 2017 (tentative) — January 2018. - PEFA Assessment for 2016 — n.a. — December 2017. - Public Debt Management and Government Bonds — n.a. — October 2017. - The Fund’s work program (timing and Board meetings): - 2017 Article IV Consultation — September – October 2017 — Board Meeting in December 2017. - First Post Program Monitoring Discussions — March 2018 — Board Meeting in May 2018 (LOT). - 2018 Article IV Consultation — October 2018 — Board Meeting in January 2019. - Mutual requests for inputs: - Fund request to Bank: growth diagnostics; assessment of competitiveness and related structural reforms (e.g., electricity sector); fiscal governance and PFM; public expenditure reform needs (civil service, pensions, disability, social assistance); nonbank financial sector development. - Bank request to Fund: periodic macro updates; joint approach to advisory work on institutional reform at the MoF on PFM and fiscal issues such as debt management, cash management, fiscal risks, and local government finances. ### Statistical issues (As of September 30, 2017) - General assessment: Data provision has some shortcomings, but is broadly adequate for surveillance. Main obstacles: real sector statistics and weak inter-institutional cooperation between government agencies. - National accounts: - Compilation has improved and is generally compliant with ESA 2010. - Room for further improvements in methodologies and compilation techniques, especially for GDP estimates using the expenditure approach. - Better source data would significantly enhance national accounts estimates. - Formal agreements for data sharing exist but cooperation needs to be more effective. - INSTAT faces severe resource constraints complicating improvements in basic indicators. - Quarterly GDP estimates released with a lag of 90 days; first annual estimates published around 15 months after year-end. - Data are subject to large revisions and there are significant discrepancies between aggregated quarterly estimates and annual results due to differences in compilation methods. - Labor statistics: - The Labor Force Survey (LFS) is of insufficient quality. - Treatment of agricultural employment needs improvement: currently all individuals owning agricultural land are considered self-employed by the survey. - Shortcomings in the LFS lead to lack of reliable income and wage indicators. - Poverty data are available with a substantial lag compared to other CESEE countries. - Price statistics: - Compilation generally follows international standards. - Estimation of imputed rent within the CPI was improved in 2003. - Since December 2015, INSTAT updates CPI weights annually using results of a new national Household Budget Survey. - PPI and construction price indexes are published quarterly due to resource constraints. - Government finance statistics: - Fiscal source data adequate to allow a broad presentation of the Albanian general government’s fiscal operations in line with GFSM 2001. - Transitioning to GFSM 2001 presentation does not appear to substantially change the overall picture but requires further improvements in fiscal statistics. - Specific needs identified: - (i) provide greater details on some items (National Taxes, Income of Budgetary Institutions, Property Compensation, Compensation for Electricity); - (ii) report transactions of Albania’s local governments in a separate statement; - (iii) break down Net Acquisition of Nonfinancial Assets (labeled as Capital Expenditure in the local presentation) into GFSM 2001 subcategories (fixed assets, inventories, valuables, and non-produced assets); - (iv) split the financing *Italic source: cr17373 - 1. The Republic of Albania has been a member of the World Bank Group (WBG) since (PDF, As of October 2017).* ### section into net acquisition of financial assets and net acquisition of liabilities (and their respective ### cr17373 - section into net acquisition of financial assets and net acquisition of liabilities (and their respective ### Fiscal reporting and accounting recommendations - Separate transactions into net acquisition of financial assets and net acquisition of liabilities (and their respective instruments). - Keep financial operations, such as issuances of letters of credit, on-lending, or transfers to off-budget funds outside of the spending perimeter. - Record the wage bill on an accrual basis to maintain a consistent standard across expenditure items. - Debt statistics reported in the quarterly Debt Bulletin should be based on a broader definition and include accounts payable (arrears), in line with GFSM. ### Monetary statistics (methodology and deviations) - Monetary data compilation framework conforms to the Monetary and Financial Statistics Manual (MFSM) 2000. - Survey of depository corporations covers the Bank of Albania (BoA) and all other deposit-taking institutions (commercial banks and savings and loans associations, or SLAs). - SLAs accounts, with the exception of loans, are produced on a cash basis, which contrasts with the MFSM recommendation of accrual accounting. - BoA’s and commercial banks’ holdings of nontradable long-term securities are recorded at book value (deviation from MFSM). ### External sector statistics — strengths and data gaps - Balance of Payments data compiled by the BoA with a time lag of less than 90 days and are methodologically sound; some estimates (particularly for international transactions outside the banking system) need refinement. - Measurement challenges remain for: - Remittances. - Monitoring some financial account transactions. - Private external debt. - Foreign assistance (data on grants from abroad not channeled through the central government are fragmented and require consolidation). - Adoption of IMF technical assistance recommendations improved measurement of primary compensation of employees, primary income, and portfolio investment. - Estimation methods for transactions outside the banking system (mostly remittances, investment transactions by nonresident Albanians, and travel exports and imports) have improved but require further refinement; such transactions contribute to relatively high errors and omissions. - External debt database ensures timely and accurate reporting of external public debt (including commitments of state-owned enterprises). - Collection of data on external grants is not timely and only covers the central government; improving grant coverage requires closer collaboration between the Donor Coordination Unit in the Office of the Prime Minister, the Ministry of Finance, and the Bank of Albania. - International Investment Position (IIP) data are compiled annually by the BoA and published nine months after year-end. ### Data standards and quality participation - Albania participates in the General Data Dissemination System (GDDS). - The country implemented e-GDDS in June 2017 at http://instat.gov.al:8080/NSDPAlbania/. - Data ROSC published in October 2006. ### Key figures from Table 3 — Albania: Statement of Operations — General Government, 2012–22 (Billions of leks) - Revenue (2012–2022 Est.): 330.4; 323.7; 366.6; 377.5; 403.1; 440.8; 465.3; 492.5; 524.1; 553.7; 585.0 - Taxes: 243.5; 236.4; 265.9; 268.9; 286.8; 316.5; 331.4; 351.4; 375.2; 397.4; 420.0 - Social contributions: 57.4; 60.0; 69.9; 71.7; 79.2; 87.7; 93.6; 98.1; 103.1; 109.2; 114.7 - Grants: 5.6; 5.7; 10.1; 11.2; 14.6; 13.8; 16.6; 17.6; 18.8; 18.2; 19.4 - Other revenue: 24.0; 21.6; 20.7; 25.7; 22.5; 22.9; 23.8; 25.3; 27.0; 28.9; 30.8 - Expenditure (2012–2022 Est.): 376.2; 394.1; 408.7; 418.5; 428.9; 467.6; 497.5; 525.5; 555.6; 590.3; 628.5 - Expense: 314.6; 328.6; 348.1; 355.9; 370.6; 396.5; 411.4; 437.7; 463.4; 495.4; 527.1 - Compensation of employees: 69.4; 70.7; 71.4; 72.5; 67.5; 74.3; 77.8; 80.6; 83.4; 89.0; 91.7 - Use of goods and services: 33.5; 32.4; 31.3; 42.4; 44.3; 44.3; 45.2; 47.1; 47.5; 51.7; 55.2 - Interest: 41.5; 43.3; 40.1; 38.6; 36.3; 32.5; 37.1; 43.0; 47.6; 53.5; 59.9 - Subsidies: 1.9; 1.6; 8.4; 6.8; 3.8; 6.9; 7.3; 6.6; 4.8; 4.5; 4.7 - Social benefits: 141.0; 150.8; 164.1; 161.4; 177.1; 184.6; 193.7; 205.2; 218.7; 231.7; 246.4 - Other expense: 27.3; 29.8; 32.9; 34.1; 41.7; 53.8; 50.4; 55.1; 61.5; 65.0; 69.2 - Net acquisition of nonfinancial assets: 61.7; 65.5; 60.5; 62.6; 58.2; 71.1; 86.1; 87.8; 92.2; 94.9; 101.4 - Domestically financed: 27.4; 36.7; 33.8; 37.7; 37.9; 34.3; 30.5; 23.9; 36.9; 35.0; 40.5 - Foreign financed: 34.3; 28.8; 26.8; 24.9; 20.4; 36.9; 55.6; 64.0; 55.4; 59.9; 60.9 - Gross Operating Balance (single value shown): 15.8; -4.9 - Net lending/borrowing (2012–2022 Est.): -45.9; -70.4; -42.1; -40.9; -25.7; -26.8; -32.2; -33.1; -31.5; -36.6; -43.5 - Transaction in financial assets and liabilities (2012–2022 Est.): -45.9; -70.4; -42.3; -40.1; -23.9; -20.1; 5.2; -34.1; -14.5; -39.2; -36.5 - Net acquisition of financial assets (2012–2022 Est.): -1.2; -16.7; 5.9; 6.5; 4.6; 3.6; -1.0; -1.0; -1.0; -1.0; -1.0 - Domestic: -1.2; -16.7; 5.9; 6.5; 4.6; 3.6; -1.0; -1.0; -1.0; -1.0; -1.0 - Foreign: 0.0 (for all years 2012–2022 Est.) - Net incurrence of liabilities (2012–2022 Est.): 44.6; 53.7; 48.2; 46.5; 28.5; 23.7; -6.2; 33.1; 13.5; 38.2; 35.5 - Domestic: 25.3; 42.9; 14.0; -24.0; 11.0; -13.0; -78.5; 20.2; -22.1; 35.6; 34.9 - Foreign: 19.4; 10.8; 34.2; 70.5; 17.5; 36.7; 72.3; 12.9; 35.7; 2.6; 0.5 ### Data dissemination and timeliness (Table of Common Indicators, as of October 2, 2017) - Exchange Rates: Latest observation 10/2/17; Date received 10/2/17; Frequency D; Frequency of Reporting D; Frequency of Publication D. - International Reserve Assets and Liabilities of the Monetary Authorities: Latest observation 9/29/17; Date received 10/2/17; Frequency D; Frequency of Reporting W; Frequency of Publication M. - Reserve/Base Money and Broad Money: Latest observation 8/17; Date received 9/15/17; Frequency M; Frequency of Reporting M; Frequency of Publication M. - Central Bank Balance Sheet: Latest observation 8/17; Date received 9/15/17; Frequency M; Frequency of Reporting M; Frequency of Publication M. - Consolidated Balance Sheet of the Banking System: Latest observation 8/17; Date received 10/2/17; Frequency M; Frequency of Reporting M; Frequency of Publication M. - Consumer Price Index: Latest observation 8/17; Date received 9/8/17; Frequency M; Frequency of Reporting M; Frequency of Publication M. - Revenue, Expenditure, Balance, and Composition of Financing — General Government and Central Government: Latest observation 8/2017; Date received 9/30/17; Frequency M; Frequency of Reporting M; Frequency of Publication M. - Stocks of Central Government and Central Government-Guaranteed Debt: Latest observation 6/2017; Date received 8/31/17; Frequency Q; Frequency of Reporting Q; Frequency of Publication Q. - External Current Account Balance: Latest observation 2017:Q2; Date received 9/10/17; Frequency Q; Frequency of Reporting Q; Frequency of Publication Q. - International Investment Position: Latest observation 2016; Date received 9/10/17; Frequency A; Frequency of Reporting A; Frequency of Publication A. - Data quality assessments reference the Data ROSC published on October 31, 2006 (mission March 8-22, 2006). ### Supplement and Fiscal consolidation (2013–2021) — key medium-term numbers (Percent of GDP) - Revenues (2013–2021 projections): 24.0; 26.3; 26.4; 27.4; 28.2; 28.2; 28.1; 28.1; 27.9; 27.8; 27.5 - Tax revenue: 22.0; 24.1; 23.9; 24.9; 25.7; 25.9; 25.7; 25.6; 25.5; 25.4; 25.2 - Non-tax revenue: 1.6; 1.5; 1.8; 1.5; 1.6; 1.5; 1.6; 1.4; 1.4; 1.4; 1.4 - Grants: 0.4; 0.7; 0.8; 1.0; 0.9; 0.9; 0.9; 1.0; 1.0; 1.0; 0.9 - Expenditures (2013–2021): 29.2; 32.2; 31.0; 29.6; 30.4; 30.2; 30.4; 29.9; 29.7; 29.4; 29.3 - Current expenditure (incl. net lending): 24.3; 25.4; 25.4; 25.7; 25.2; 25.5; 25.0; 24.6; 24.6; 24.4; 24.4 - Capital expenditure: 4.8; 4.3; 4.4; 4.0; 4.8; 4.6; 5.2; 5.2; 5.0; 4.9; 4.7 - Overall balance: -5.2; -5.9; -4.6; -2.3; -2.2; -2.0; -2.2; -1.9; -1.8; -1.6; -1.8 - Primary balance: -2.0; -3.0; -1.9; 0.2; 0.2; 0.1; 0.3; 0.4; 0.6; 0.9; 0.9 - Public debt (percent of GDP): 70.4; 72.0; 74.1; 73.3; 72.7; 71.5; 70.1; 71.3; 68.7; 66.7; 64.0 - Domestic debt: 43.4; 42.4; 39.7; 39.0; 37.3; 35.3; 37.1; 31.5; 30.0; 28.3; 27.7 - Foreign debt: 27.0; 29.6; 34.4; 34.3; 35.4; 36.2; 33.0; 39.8; 38.7; 38.3; 36.3 - Memo: Nominal GDP (in billions of leks): 1,350; 1,395; 1,428; 1,473; 1,555; 1,562; 1,650; 1,658; 1,764; 1,884; 2,013 - Memo: Public debt (in billions of leks): 950; 1,005; 1,057; 1,080; 1,131; 1,117; 1,157; 1,182; 1,211; 1,255; 1,288 ### Macroeconomic developments and authorities' outlook (statement highlights) - Real growth: 4.1 percent (y-on-y) in Q2 2017. - Investment surged by 14.3 percent, supported by FDI in the energy sector. - Current account deficit trended down to an historical low of 6.3 percent of GDP on a twelve-month basis. - Annual inflation: 1.9 percent in October. - Official unemployment rate: 13.9 percent. - Authorities expect: - Continued solid growth supported by improved fundamentals, wage pickup, accommodative monetary conditions, improved external conditions in Europe, and continued FDI inflows. - Current account deficit to reduce to around 6 percent of GDP in the medium term. - Fiscal 2017 execution: - Expected primary surplus of 0.4 percent of GDP, representing a consolidation of 2.7 percentage points of GDP since 2014. - First ten months: tax revenues and primary current expenditures overperformed targets; provisional cash figures close to balance. - Clearance of contracts-related arrears and acceleration in VAT credit refunds planned. - 2018 budget aims: - Further improvement of the primary balance in 2018 by 0.2 percentage points of GDP. - Primary current expenditure to be reduced by 0.3 percentage points of GDP by avoiding new discretionary spending (except targeted wage increases in health care and education). - Expectation that tax-to-GDP ratio will stabilize at last year’s peak via measures including a reformed value-based property tax and an informality campaign. - New PPPs limited to a few strategic infrastructure projects; draft budget places a limit on total value of PPP projects and requires transparent project-related payments. - Public financial management reforms planned: - Extend coverage of the Treasury IT system to avoid re-incurrence of arrears. - Modify Procurement Law, Financial Management Control Law, and Organic Budget Law to introduce binding multi-year commitment limits. *Sources: Albanian authorities; IMF staff estimates and projections.* ### introduction of adequate fiscal rules obliges the government (i) to continuously target annual ### introduction of adequate fiscal rules obliges the government (i) to continuously target annual ### Fiscal framework and rules - Introduction of adequate fiscal rules obliges the government: - (i) to continuously target annual reductions in the debt-to-GDP ratio until it reaches 45 percent; - (ii) to budget annual buffers to absorb potential negative shocks; - (iii) to anchor nominal GDP projections with those of the IMF; - (iv) to apply a “golden rule” regarding public investment vs. borrowing; and - (v) to restrain deficit slippages during electoral years. - The new law on local finances, prepared with help from USAID and the World Bank: - improves reporting requirements; - tightens monitoring; and - provides mechanisms for dealing with local governments that face financial difficulties. - The budget includes — for the first time — legal provisions for the transfer of foreign-sourced funds from a fiscal year to the next, intended to: - make for a better allocation of funds; - help reduce refinancing risk; and - potentially lower financing costs. ### Medium-term debt strategy and market development - Key priorities of the medium-term debt strategy: - progressive lengthening of maturities; - development of a liquid secondary market for government securities. - Expected benefits from progress on these fronts and improvements in the primary market for domestic bonds include: - better debt management; - enhanced risk reduction; and - improvements in the monetary policy transmission mechanism. ### Monetary policy and financial stability - Bank of Albania (BoA) policy stance and outlook: - Maintaining an accommodative policy stance in line with its inflation targeting framework. - Continued monetary stimulus considered required for some time; need unlikely to diminish before the fourth quarter of 2018. - Any normalization will be weighed against a sustained convergence of inflation to the Bank of Albania’s 3 percent target, which updated forecasts envisage to occur within the first half of 2019. - Credit and currency composition: - Credit in domestic currency is expanding at a steady pace of close to 10 percent. - The share of FX loans in total credit is declining. - Non-performing loans (NPLs): - September data put NPLs at 14.8 percent of loans. - Continuous decline in the NPL ratio over the last year attributed to measures in the action plan closely monitored by the BoA. - Early 2017 write-offs were the main driver; banks are now increasingly engaged in credit restructuring operations under a new BoA regulation. - NPLs remain adequately provisioned and banks dispose of abundant liquid assets. - Further improvements expected as the new legislation on bankruptcy, bailiff procedures, and out-of-court agreement is progressively implemented. - BoA judges that a key element for the reduction of the NPL ratio could also result from a steady growth in lending going forward. - Banking system and supervision: - The banking system remains well-capitalized, liquid and profitable. - Process to strengthen the BoA’s supervisory and regulatory capacity, and to align it to EU standards, is underway. - Priority to enhance supervision of nonbank financial institutions and to ensure high transparency and governance standards in developing capital market institutions. - BoA committed to pursue a gradual de-euroization, with due consideration to disintermediation risks and the impact on FX markets. - External buffers: - Gross foreign reserves continue to increase and are well above the ARA metric, providing an adequate buffer to external shocks. ### Structural reforms - Broad objective: - Continue to enhance competitiveness and medium-term growth, building on recent advancements in rule of law, energy sector efficiency, and addressing the shortage of skilled labor. - Judicial reform: - Considered one of the most significant achievements in recent history. - Reform requires the rewriting of nearly one-third of the Constitution. - Three institutions in charge of the vetting process have recently started working on a number of cases. - New vetting process will ensure prosecutors and judges with unexplained wealth, insufficient training, or who have issued questionable decisions are removed. - Reform will establish an independent prosecutor and a specialized unit to investigate and prosecute corruption and organized crime. - Authorities expect the judiciary reform to deter corruption and to promote foreign and domestic investment. - Other initiatives are moving in parallel to improve courts’ efficiency and reduce backlogs. - Power and energy sector: - Authorities intend to sustain reform momentum in the power sector, building on steps taken on bill collections, lowering distribution losses, and repaying arrears to the private sector. - Government targeting further improvement of governance and operational practices of state-owned enterprises to place their improved financial position on a sustainable footing. - Albania progressed in the gas market by unbundling the state-owned oil and gas company and establishing a transmission system operator to develop and manage gas infrastructure. - Government studying feasibility of a secondary gas infrastructure and identifying priority gasification projects as part of the Gas Master Plan for Albania, for possible implementation in the 2018-20 period. - Progress in the renewable energy sector with the adoption of a law promoting the use of energy from renewable sources. - Labor market and social inclusion: - With EU support, steady progress in improving labor market policies. - Reforms have strengthened the labor market’s legal framework, diversified job opportunities, and raised the quality of vocational training services. - A law approved in February 2017 creates a new cooperation model between the public employment service and the private sector, including joint identification of labor market needs and private-sector participation in curricula development. - Positive trends in youth and female employment indicators, with reductions in the employment gender gap and in the female and south unemployment rates. ### Conclusions - Albanian authorities remain fully committed to their reform agenda to pursue high, sustainable and job-creating growth in line with the economic and institutional EU convergence process. - Authorities recognize that a well-calibrated combination of fiscal, monetary, financial, and structural policies is essential to continue on this path. *IMF staff report content (cr17373).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17373.pdf_