## cr1764

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### EXECUTIVE SUMMARY
- Background
  - Extended Arrangement approved in February 2014: access equivalent to SDR 295.42 million (212.1 percent of current quota).
  - Total disbursements to date: SDR 238.14 million; final disbursement equivalent to SDR 57.28 million upon completion of combined ninth and tenth reviews.
  - Program aimed to correct large macroeconomic imbalances and increase economic growth.
  - 2013: GDP growth decelerated to its lowest level in decades; public debt rose rapidly; banking system deleveraging and rising NPLs increased rollover risks.
- Recent economic developments
  - GDP grew by over 3 percent in the first 9 months of 2016 (yoy).
  - Unemployment declined from 17.7 to 15.2 percent between 2015:Q4 and 2016:Q3.
  - Inflation:
    - Headline inflation: 2.2 percent (yoy) in December (from 0.2 percent in February).
    - Core inflation: 1 percent in December (from -1.2 percent in February).
  - Exchange rate and reserves:
    - Nominal exchange rate appreciated by around 1.7 percent in December (yoy, average).
    - Gross FX reserves: around 5¾ months of projected imports.
  - Monetary and credit:
    - Bank of Albania policy rate held at 1.25 percent since May.
    - Lek-denominated private credit growth: 9 percent (yoy) in November.
    - Corporate lending: -3 percent (yoy) in November.
  - External sector:
    - Current account deficit widened in 2016:H1.
    - FDI: 7 percent of GDP, covering nearly two-thirds of the current account deficit in 2016.
    - Errors and omissions around 2–3 percent of GDP, likely unrecorded private remittances.
- Program performance
  - All performance criteria met; two of three indicative targets narrowly missed.
  - Eleven structural benchmarks implemented (seven with delays); three missed.
  - Achievements: comprehensive pension and electricity sector reforms; overhaul of bankruptcy legislation.
- Fiscal outcomes (2016, Billions of leks and percent of GDP as presented)
  - Total revenue and grants: 364.4 (24.2 percent of GDP)
  - Tax revenue: 333.1 (22.1 percent of GDP)
  - Non-tax revenue: 20.7 (1.4 percent of GDP)
  - Grants: 10.6 (0.7 percent of GDP)
  - Total expenditure: 363.8 (24.2 percent of GDP)
  - Primary expenditure: 329.7 (21.9 percent of GDP)
  - Current expenditure: 319.7 (21.2 percent of GDP)
  - Capital expenditure: 42.0 (2.8 percent of GDP)
  - Policy net lending: 2.1 (0.1 percent of GDP)
  - Overall balance: 0.6 (0.0 percent of GDP)
  - Primary balance excl. arrears clearance: 34.7 (2.3 percent of GDP)
- Final 2016 fiscal outcome: primary surplus shrank to 0.2 percent for 2016; general government debt at end-December 2016: 72.1 percent of GDP (compared with 73.7 percent at end-2015).

### BANKING SECTOR, NPLs, AND FINANCIAL STABILITY
- Banking system health and developments
  - Gross NPLs declined in 2015 due to mandatory write-offs; NPL ratio rose to 20.4 percent in November 2016 following two large corporate bankruptcies and NPL reclassifications.
  - System-wide capitalization: 15.6 percent of risk-weighted assets in 2016:Q3 (regulatory minimum: 12 percent).
  - About half of FX-denominated loans (around 1/3 of total loans) are unhedged.
  - 70.5 per cent of NPLs are fully provisioned; net NPLs at 5.4 percent.
  - Credit shift observed: from euros to lek; from large corporates to SMEs and households.
  - Banking concentration:
    - Largest four banks account for 70 percent of bank assets.
    - Foreign subsidiaries comprise 86 percent of bank assets.
- NPL resolution and legal framework
  - New Bankruptcy Law approved November 2016; amendments to Private Bailiffs Law and Civil Procedure Code adopted to simplify NPL resolution.
  - Implementing regulations for Bankruptcy and Private Bailiffs laws should be approved rapidly; out-of-court resolution for large borrowers recommended.
  - Coordination mechanism among BoA, MoF, and GDT established to integrate tax authority into collateral execution and streamline tax treatment of NPLs.
- Supervision and nonbank regulation
  - BoA strengthened internal audit, set up external audit committee, adopted IFRS, implemented early warning system, and joined European Banking Authority’s College of Supervisors.
  - AFSA: new liquidity and asset valuation regulations for investment funds to be fully phased in by mid-2017; capacity constraints and concentration in illiquid government securities are concerns.
  - Bank Resolution Law aligned with EU Bank Recovery and Resolution Directive; deposit insurance being expanded.

### MACROECONOMIC OUTLOOK AND RISKS (SELECTED PROJECTIONS)
- GDP growth:
  - 2016: estimated 3.4 percent
  - 2017: projected 3.7 percent
  - Medium term: expected to rise to just over 4 percent under the baseline
- Inflation:
  - 2016 to 2017: projected rise from 2.2 to 2.6 percent
  - Underlying inflation expected to reach BoA’s target of 3 percent in 2018–19
- Current account:
  - 2016: expected 12.1 percent (somewhat narrower than 13 percent in last review)
  - Expected to widen in 2017–18 with investment imports from energy projects; medium-term narrowing as project imports tail off
- External financing: dominated by FDI and official financing
- Downside risks:
  - Political tensions ahead of 2017 general election
  - Weakening growth in the EU
  - Erratic rainfall affecting electricity generation and causing costly electricity imports
  - Slippages in reforms tackling corruption and organized crime
- Upside possibilities:
  - Judicial reform improving confidence
  - Accelerated donor support via EU accession
  - Greater spillovers from FDI-financed projects boosting investment and credit recovery

### FISCAL POLICY, DEBT OBJECTIVES, AND STRUCTURAL FISCAL REFORMS
- Public debt objective and required adjustment
  - Authorities committed to reducing public debt to around 60 percent of GDP by 2019 (from 72.1 percent of GDP in 2016).
  - Under the baseline, measures of around 1 percent of GDP annually are required; overall general government deficit to decline to 0.1 percent of GDP in 2019 from 2.2 percent of GDP in 2016.
  - Refinancing needs: rollover needs around 25 percent of GDP.
- 2017 fiscal stance
  - Authorities target a primary surplus of 1.2 percent of GDP for 2017; approved budget targets a primary surplus of 0.7 percent of GDP plus commitment to save additional one-off unbudgeted revenues of around 0.5 percent of GDP.
- Revenue measures (high-level)
  - Raise oil-related revenues.
  - Broaden base for circulation tax on luxury cars.
  - Reduce exemptions and pilot expand coverage for property tax.
  - Legislated increases in cigarette excises starting in 2018 to gradually converge to EU standards.
  - Address increasing stock of VAT credits.
- Expenditure measures (high-level)
  - Lock in permanent savings under recurrent expenditures (ongoing vacancies).
  - Electricity sector expected to start repaying recent public support.
  - Moderate public wage and pension increases; contain wage bill as percent of GDP to 2016 levels.
  - Provisions for property compensation claims and more resources to local governments conditioned on enhanced reporting, monitoring, and clearing legacy arrears.
- Tax administration reforms
  - New IT system and organizational restructuring focused on compliance-based risk management.
  - Audits of VAT refunds refocused on high-risk cases.
  - Address large stock of tax arrears through debt installment and write-off arrangements.
- Property tax reform
  - Aim to introduce a valuation-based property tax by end-2017; Prime Minister adopted action plan and high-level working group appointed.
  - Fiscal cadastre development in cooperation with electricity distribution company; pilots in four large municipalities.
  - New property tax law to be submitted to Parliament in September 2017 (per Letter of Intent) and valuation methodology to be adopted by Council of Ministers shortly after.

### MONETARY POLICY AND DE-EUROIZATION
- Monetary stance
  - BoA maintained accommodative stance with policy rate lowered by 175 basis points over 2014–16 to 1.25 percent.
  - BoA committed to achieving an average annual CPI inflation of 3 percent over the medium term.
- De-euroization strategy
  - BoA focused on reducing unhedged FX borrowing and ensuring banks internalize FX lending and deposit risks.
  - Proposed measures include different reserve remunerations for euro and lek deposits and higher liquid asset requirements against FX deposits.
  - FX reserves: end-January (figure in source) around 3 bn euros, covering slightly below 6 months of imports; FX reserves deemed adequate by standard metrics but additional buffers considered desirable.
  - Any FX intervention should be gradual, transparent, and via pre-announced auctions.
- Monetary transmission constraints
  - High bank risk aversion, weak credit demand, and pervasive euroization limited transmission to lending rates.

### PROGRAM DESIGN, FINANCING, AND IMF RELATIONS
- Program schedule and reviews
  - Ninth and tenth reviews combined due to compressed schedule; controlling test date end-November 2016.
  - Staff supports completion of Ninth and Tenth Reviews and continuation with Post-Program Monitoring while outstanding obligations to the Fund exceed 200 percent of quota.
- IMF financing and Albania’s quota
  - Total scheduled availability under arrangement: 295.42 (Millions of SDR) and 212.1 (In Percent of Quota).
  - Albania's IMF quota: SDR 139.3 million.
- External financing (selected, Millions of Euros)
  - Total financing requirement: 2016: 1,393; 2017: 1,614; 2018: 1,661; 2019: 1,600.
  - Major financing sources (selected):
    - Foreign direct investment, net: 967 (2017), 883 (2018), 735 (2019)
    - Official medium- and long-term project loans: 201 (2017), 230 (2018), 208 (2019)
    - Official budget support loans (includes IMF): 359 (2017), 171 (2018), 71 (2019)
      - IMF component (Millions of Euros): 144 (2016), 73 (2017), 0 (2018), 0 (2019)
    - Commercial borrowing (Eurobond and PBG): 700 (2015)
- IMF exposure and repayment capacity (selected)
  - Fund credit outstanding (end of period, Millions of SDRs): 16.4 (2013), 57.7 (2014), 129.3 (2015), 241.5 (2016), 296.8 (2017), 291.7 (2018), 277.3 (2019)
  - Fund repurchases and charges (Millions of SDRs; selected): 6.2 (2017), 9.6 (2018), 18.8 (2019), 31.5 (2020), 47.6 (2021), 51.7 (2022)
  - Fund credit outstanding (In percent of quota; selected): 27.3, 96.1, 215.6, 173.4, 213.0, 209.4, 199.1, 179.2, 147.3, 111.1 (annual series in Table 7)

### PROGRAM IMPLEMENTATION, BENCHMARKS, AND PRIOR ACTIONS
- Structural benchmarks (summary)
  - Of fourteen SBs: four met on time, seven implemented with delays, three missed.
  - Delays mainly due to capacity constraints and recruitment challenges.
  - Examples of missed or delayed items:
    - Approval by Parliament of valuation-based property tax legislation: Not met (postponed to 2017).
    - Removal of 35 kV and 20 kV medium-voltage consumers from regulated tariff system: Not met.
- Prior actions for combined Ninth and Tenth Reviews (selected and met)
  - Initiate actions towards introducing a valuation-based property tax by end-2017: Met.
  - Repay central government arrears to bring stock below 1 billion lek: Met.
  - Upload prioritized MoT contracts into multi-year commitment registry: Met.
  - ARA Board to approve establishment of internal audit unit and post vacancies: Met.
- Fiscal targets for 2017 (Table 4, Billions of leks, quarterly cumulative)
  - General government primary modified cash balance (cumulative): Mar 12.0; Jun 19.9; Sep 28.5; Dec 18.9.
  - Ceiling on general government primary expenditure (cumulative): Mar 90.7; Jun 195.1; Sep 297.7; Dec 425.1.
  - Ceiling on gross disbursements of energy guarantees (cumulative, excluding rollover): Mar 0.4; Jun 0.4; Sep 0.4; Dec 0.4.
  - Ceiling on contracting of non-energy guarantees (cumulative): Mar 0.1; Jun 0.2; Sep 0.3; Dec 0.3.
  - Ceiling on the stock of central government domestic arrears: Mar 0.0; Jun 0.0; Sep 0.0; Dec 0.0.
  - Large uncertain one-off revenues (cumulative): Mar 3.3; Jun 7.4; Sep 8.0; Dec 8.3.

### STRUCTURAL REFORMS, INVESTMENT CLIMATE, AND COMPETITIVENESS
- Key reforms enacted
  - July 2016: Judicial reform package passed including constitutional amendments.
  - December 2016: Amendments to Tax Procedure Code approved.
- Investment climate priorities
  - Secure property rights and advance land restitution.
  - Continue investment in infrastructure to improve regional connectivity.
  - Remove structural bottlenecks to raise growth potential.
- Sectoral reforms and outcomes
  - Pension reform (mid-2014): retirement age raised; pensions indexed to inflation; pension fund deficits declined from 2.1 percent of GDP in 2013 to 1.8 percent of GDP in 2016.
  - Electricity sector:
    - Distribution losses fell from 45 percent in 2013 to 28 percent in 2016; target to reduce to 14 percent by 2019.
    - Budget allocations to energy sector fell from 0.9 percent of GDP in 2014 to 0.1 percent in 2017.
    - New power law passed May 2015; progressive phasing out of price regulation action plan adopted July 2016.

### STAFF APPRAISAL, POLICY RECOMMENDATIONS, AND PRIORITIES
- Overall assessment
  - Extended Arrangement judged successful in achieving objectives: growth recovery, low inflation, revenue-based fiscal adjustment, reduced fiscal deficit, start of public debt decline, lower refinancing risks, pension and electricity reforms, and central government arrears clearance.
  - Conditional recommendation to start EU accession negotiations noted.
- Main post-program priorities
  - Continue lowering fiscal vulnerabilities; steady fiscal consolidation to reach around 60 percent of GDP public debt by end-2019.
    - Under baseline: require measures of around 1 percent of GDP annually.
  - Reduce NPLs and revive credit growth.
  - Implement growth-enhancing structural reforms to boost competitiveness.
- Specific policy recommendations
  - Fiscal:
    - Steadfast fiscal consolidation in 2017 and beyond.
    - Consolidation strategy based on broadening tax base and improving tax compliance and administration.
    - Refrain from granting new tax incentives.
    - Urgently implement action plan to introduce valuation-based property tax.
    - Modernize tax administration and improve compliance.
    - Strengthen public debt management to lower rollover needs and exposure to domestic banking system.
  - Monetary and financial sector:
    - Maintain BoA’s accommodative monetary stance while inflation expectations remain anchored and financial stability concerns contained.
    - Encourage de-euroization gradually, mindful of disintermediation risks.
    - Accelerate amendments to central bank law to safeguard independence.
    - Strengthen supervision of fastest-growing and systemically important banks.
    - Tackle high NPLs to ease bank risk aversion and revive credit flows.
  - Nonbank sector:
    - Build AFSA capacity and crisis preparedness.
    - Ensure high transparency and governance standards when developing capital market institutions.

*Source: IMF staff report and Albanian authorities, content unit cr1764.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Background
- In February 2014, the Executive Board approved a three-year Extended Arrangement with access equivalent to SDR 295.42 million (212.1 percent of current quota).
- Total disbursements of SDR 238.14 million have been made so far, and a final disbursement equivalent to SDR 57.28 million will be made available upon completion of the combined ninth and tenth reviews.
- Fund engagement with Albania will continue through a Post-Program Monitoring.
- The Extended Arrangement aimed to correct large macroeconomic imbalances and increase economic growth.
- In 2013, Albania’s GDP growth decelerated to its lowest level in decades following the economic crisis in key European trading partners (Greece and Italy).
- Public debt rose rapidly due to pre-electoral fiscal slippages, as well as an unsustainable pension system and electricity sector.
- Rollover risks escalated as the banking system, heavily exposed to the government and facing rising nonperforming loans (NPLs), continued to deleverage.

### Recent Economic Developments
- The economic recovery is strengthening, supported by energy-related investments and a gradual recovery in domestic demand.
- GDP grew by over 3 percent in the first 9 months of 2016 (yoy), driven by consumption and large energy-related FDI projects.
- Net exports declined reflecting lower oil exports as well as higher FDI-related imports.
- The unemployment rate declined from 17.7 to 15.2 percent between 2015:Q4 and 2016:Q3.
- Labor participation rate has continued to rise.
- Inflation:
  - Headline inflation accelerated to 2.2 percent (yoy) in December from 0.2 percent in February.
  - Core inflation rose to 1 percent in December from -1.2 percent in February.
- Exchange rate and reserves:
  - The nominal exchange rate appreciated slightly by around 1.7 percent in December (yoy, average).
  - Gross FX reserves are comfortable at around 5¾ months of projected imports.
- Monetary policy and credit:
  - The Bank of Albania paused policy rate cuts and has held its policy rate at a historical low of 1.25 percent since May.
  - Lek-denominated private credit growth reached 9 percent (yoy) in November.
  - Overall credit remains stagnant due to the sizable overhang of nonperforming loans (NPLs) and deleveraging by foreign-owned banks; corporate lending was -3 percent (yoy) in November.
- External sector:
  - The current account deficit widened in 2016:H1.
  - FDI remains the single largest source of financing at 7 percent of GDP, covering nearly two-thirds of the current account deficit in 2016.
  - Sovereign spreads have been on a declining trend since the ratings upgrade in early 2016.
  - The recorded current account deficit overstates external imbalances because of sizable errors and omissions (around 2–3 percent of GDP), likely unrecorded private remittances.
- EU accession:
  - In early November, the European Commission recommended the launch of EU accession negotiations with Albania, conditional on further progress with judicial reform (vetting of judges and prosecutors).
  - Accession negotiations are not expected to start until after the next Parliamentary election in June 2017.

### Program Performance
- All performance criteria were met, although two out of the three indicative targets were missed by a narrow margin.
- Eleven structural benchmarks were implemented, albeit seven with delays, while three were missed.
- Over the past three years, the authorities have met most quantitative targets and have made good progress in implementing the structural reform agenda under the program, albeit with some delays.
- Achievements under the program included comprehensive pension and electricity sector reforms, and an overhaul of bankruptcy legislation.
- Remaining implementation risks exist despite strengthened legislative and institutional frameworks.

### Fiscal Developments and Outlook
- November fiscal targets were met with comfortable margins due to across-the-board expenditure underexecution.
- The primary balance reached 2.3 percent of GDP, 1.8 percent of GDP above target, despite a sizable revenue shortfall.
- Tax underperformance—VAT in particular—stems from lower-than-expected oil prices and inflation, and a growth mix that was less consumption- and more investment-driven than anticipated.
- Expenditure:
  - Wage bill benefited from ongoing vacancies in the public administration.
  - Local spending was behind schedule following reorganization of local government units.
- Preliminary December fiscal data: continued revenue shortfalls and a large pickup in capital spending shrank the primary surplus to 0.2 percent for 2016, broadly in line with the program.
- General government debt:
  - At end-December 2016, general government debt is estimated at 72.1 percent of GDP, compared with 73.7 percent of GDP at end-2015.
  - 2016 general government debt includes arrears owed by local governments.
- Select fiscal figures (2016, Billions of leks and percent of GDP as presented):
  - Total revenue and grants: 364.4 (24.2 percent of GDP)
  - Tax revenue: 333.1 (22.1 percent of GDP)
  - Non-tax revenue: 20.7 (1.4 percent of GDP)
  - Grants: 10.6 (0.7 percent of GDP)
  - Total expenditure: 363.8 (24.2 percent of GDP)
  - Primary expenditure: 329.7 (21.9 percent of GDP)
  - Current expenditure: 319.7 (21.2 percent of GDP)
  - Capital expenditure: 42.0 (2.8 percent of GDP)
  - Policy net lending: 2.1 (0.1 percent of GDP)
  - Overall balance: 0.6 (0.0 percent of GDP)
  - Primary balance excl. arrears clearance: 34.7 (2.3 percent of GDP)

### Key Issues and Policy Recommendations
- Authorities’ commitments:
  - Continue lowering fiscal vulnerabilities.
  - Revive overall credit growth.
  - Implement growth-enhancing structural reforms.
- Fiscal policy priorities:
  - Consolidate public finances based on a strategy of broadening the tax base and improving tax compliance and administration.
  - Advance fiscal structural reforms to tackle fiscal risks and strengthen public financial management.
  - Sustain reform momentum in the power sector.
- Monetary policy:
  - The central bank’s accommodative monetary policy stance should continue given low underlying inflationary pressure and still nascent demand recovery.
- Financial sector and credit:
  - Addressing the high stock of nonperforming loans (NPLs) remains key for reviving credit and supporting growth.
- Post-program priorities:
  - Continue focusing on strengthening public finances and the financial sector, and on implementing structural reforms to boost competitiveness.
  - Main priorities: seek revenue-based fiscal consolidation, reduce NPLs, and advance reforms to improve the business climate to boost confidence, spur investment, and achieve higher and sustainable growth.

*Source: IMF staff and Albanian authorities, Executive Summary (cr1764).*

### 12. The banking system remains liquid and well capitalized, but is constrained by

### 12. The banking system remains liquid and well capitalized, but is constrained by sizable NPLs

### Financial system health and banking-sector developments
- Gross nonperforming loans (NPLs) declined significantly in 2015 due to mandatory write-offs of loss loans; the NPL ratio subsequently increased to 20.4 percent in November 2016 as a result of two large corporate bankruptcies (by an oil refinery and a commodity exporter) and improved supervision actions leading to NPL reclassifications.
- Profitability and capital adequacy ratios fell in 2016 due to higher provisioning requirements.
- System-wide capitalization stood at 15.6 percent of risk-weighted assets in 2016:Q3, well above the regulatory minimum of 12 percent.
- Liquidity buffers remain comfortable.
- Private sector credit is slowly recovering, gradually shifting:
  - from euros to lek
  - from large corporates to SMEs and households
- About half of foreign currency denominated loans (around 1/3 of total loans) are unhedged, heightening financial vulnerabilities.

### Program performance related to financial sector and broader targets
- All performance criteria were met with comfortable margins.
- Two out of three indicative targets were missed:
  - The indicative target on distribution losses in the electricity sector was missed due to delays in infrastructure investment needed to reduce technical losses.
  - The end-October indicative target on the accumulation of central government domestic arrears was missed by a small margin (0.2 percent of GDP), mainly due to road construction and water infrastructure projects, as well as court decisions regarding layoffs and expropriations.
- As a prior action to address central government arrears, the authorities have repaid almost all accumulated arrears to bring the stock of outstanding arrears below 1 billion lek.
- The lower inner band under the Inflation Consultation Clause was missed; staff and the authorities concurred that the inflation shortfall did not warrant further policy action at this stage, as upward pressures are building.
- Of fourteen structural benchmarks (SBs):
  - four SBs were met on time,
  - seven were implemented with delays,
  - three were missed.
- Delays in SB implementation were largely due to capacity constraints and recruitment challenges at implementing agencies; the design of a valuation methodology and drafting of valuation-based property tax legislation were postponed to October, delaying parliamentary approval to 2017.

### Macroeconomic outlook and risks (selected projections and risks relevant for banking sector)
- GDP growth:
  - estimated at 3.4 percent in 2016
  - projected to reach 3.7 percent in 2017
  - expected to rise to just over 4 percent over the medium term under the baseline
- Inflation:
  - projected to rise from 2.2 to 2.6 percent (2016 to 2017)
  - underlying inflation expected to gradually rise to BoA’s target of 3 percent in 2018–19
- Current account deficit:
  - expected to be 12.1 percent in 2016 (somewhat narrower than 13 percent in the last review)
  - expected to widen somewhat in 2017–18 as demand strengthens and imports of investment goods related to large energy projects pick up; medium-term narrowing expected as energy-related project imports tail off and exports pick up
- External financing will remain dominated by FDI and official financing.
- Downside risks:
  - political tensions ahead of the 2017 general election could hinder structural reform implementation,
  - weakening growth in the EU could spill over to Albania,
  - erratic rainfall could affect electricity generation and lead to expensive electricity imports posing quasi-fiscal risks,
  - slippages in reforms tackling corruption and organized crime could erode confidence and investment.
- Upside possibilities:
  - improved confidence following judicial reform passage,
  - accelerated donor support as part of EU accession,
  - greater spillovers from FDI-financed projects leading to higher investment and stronger credit recovery.

### Policy priorities and recommendations discussed
- Main objectives for final review and Post-Program Monitoring:
  - a macroeconomic policy mix combining fiscal consolidation with an accommodative monetary policy stance given limited fiscal space, negative output gap, low underlying inflation, and need to support competitiveness;
  - timely implementation of the fiscal structural reform agenda to reduce fiscal risks while achieving growth-friendly consolidation;
  - follow-up actions to address NPLs and strengthen supervision to ensure financial stability.
- Follow-up actions to address NPLs and supervision:
  - strengthen supervision to ensure financial stability (no additional numeric targets provided in this section).

### Ensuring fiscal sustainability and structural fiscal reforms (implications for financial sector)
- Public debt objective:
  - authorities committed to reducing public debt to around 60 percent of GDP by 2019 from 72.1 percent of GDP in 2016.
  - under the baseline, measures of around 1 percent of GDP annually are required and a decline in the overall general government deficit to 0.1 percent of GDP in 2019 from 2.2 percent in 2016.
  - refinancing needs remain significant given rollover needs of around 25 percent of GDP.
- Authorities target a primary surplus of 1.2 percent of GDP for 2017; the approved budget targets a primary surplus of 0.7 percent of GDP with a commitment to save additional one-off unbudgeted revenues of around 0.5 percent of GDP.
- Fiscal measures focus on growth-friendly adjustment to broaden the tax base, improve tax compliance, and introduce a valuation-based property tax.

### Key fiscal and structural measures relevant to banking and financial stability
- Revenue measures in the 2017 budget (high-level):
  - raise oil-related revenues,
  - broaden the base for the circulation tax on luxury cars,
  - reduce exemptions and commence pilot projects to expand coverage and improve collections from the current area-based property tax,
  - legislated increases in cigarette excises starting in 2018 to gradually converge to EU standards,
  - address increasing stock of VAT credits.
- Expenditure measures in the 2017 budget (high-level):
  - lock in permanent savings under recurrent expenditures (e.g., ongoing vacancies),
  - electricity sector expected to start repaying recent public support,
  - moderate public wage and pension increases with containment of the wage bill as a percent of GDP to 2016 levels,
  - provisions for property compensation claims and more resources to local governments conditioned on enhanced reporting and monitoring and on clearing legacy arrears.
- Tax administration reforms:
  - implementation of a new IT system and comprehensive organizational restructuring focused on compliance-based risk management,
  - audits of VAT refunds refocused on high-risk cases,
  - addressing large stock of tax arrears through debt installment and write-off arrangements.
- Property tax reform:
  - aim to introduce a valuation-based property tax by end-2017,
  - Prime Minister adopted an action plan and appointed a high-level working group,
  - fiscal cadastre development in cooperation with electricity distribution company,
  - pilots in four large municipalities to strengthen collections by sharing national property database and integrating property tax bills into electricity/water bills.
- Public investment management:
  - implementing PIMA recommendations to reduce project fragmentation and curb unbudgeted contracted investment projects that have caused recurring arrears.
- Arrears prevention:
  - establishment of an internal audit unit (prior action),
  - financial inspection and revised framework agreement for road project supervisors to prevent clearing invoices for works exceeding budget allocations,
  - a 5-year financing plan prepared for prioritized unbudgeted investment projects.
- PPPs and local government reform:
  - Organic Budget Law amended in June 2016 to limit total stock of PPPs, integrate PPPs into the budgetary process, and strengthen MoF’s role in assessment and monitoring;
  - launch of a public register of all active PPP projects to ensure transparency;
  - new law on local finances being prepared to address fiscal risks and improve transparency, monitoring, and accountability;
  - MoF estimates local government arrears at 0.7 percent of GDP.

### Monetary policy stance and central bank priorities
- With inflation below the BoA’s target of 3 percent, accommodative monetary policy is expected to continue.
- The BoA is implementing a de-euroization strategy focused on:
  - reducing unhedged FX borrowing,
  - ensuring banks internalize risks of FX lending and FX deposits.
- FX reserves:
  - BoA is committed to maintaining adequate FX reserve buffers; FX reserves are adequate by standard metrics.
  - Authorities consider additional reserve buffers desirable because of increasing euro-denominated deposits, the large quantity of unhedged FX-denominated loans in the banking system, and the moderate overvaluation of the lek.
  - Staff emphasized that any FX intervention should be undertaken gradually, in a transparent manner, and through pre-announced auctions to prevent disorderly market conditions.

*Source: IMF staff report excerpt (chapter text as provided).*

### 24. The authorities have made substantial progress in rebuilding the credibility of the

### 24. The authorities have made substantial progress in rebuilding the credibility of the

### Credibility of the central bank and governance
- The BoA has strengthened its internal audit, set up an external audit committee, and adopted IFRS.
- The authorities are working on amending the BoA Law to align it with the European System of Central Banks Statute.
- The BoA has not intervened since August 2015 but has engaged in swap operations with the government.
- At end-September 2016, euro-denominated deposits account for 52 percent of total deposits.

### Safeguarding financial stability and unlocking credit
- The BoA continues to strengthen risk-based supervision and its crisis management framework (LOI ¶15 and 17).
- The banking system is concentrated and dominated by foreign subsidiaries.
  - The largest four banks account for 70 percent of bank assets.
  - Foreign subsidiaries comprise 86 percent of bank assets.
- The BoA is monitoring the fastest-growing and systemic banks, as well as banks expanding into non-banking activities.
- An early warning system has been recently implemented.
- The BoA has entered the European Banking Authority’s College of Supervisors.
- With Fund TA, further efforts are underway to develop a macro-prudential policy toolkit.
- The BoA is phasing in an expansion of deposit insurance and has aligned the Bank Resolution Law with the EU’s Bank Recovery and Resolution Directive.

### Nonperforming loans (NPLs) and resolution framework
- The authorities have made substantial progress in implementing a comprehensive action plan to reduce NPLs (LOI ¶16 and 18).
- The new Bankruptcy Law was approved by Parliament in November 2016, together with amendments to the Private Bailiffs Law and the Civil Procedure Code aimed at simplifying the NPL resolution process.
- Authorities are seeking measures to facilitate out-of-court debt restructuring.
- Efforts are underway to integrate the tax authority into the collateral execution process and to streamline the tax treatment of NPLs.
- The BoA has intensified monitoring of banks’ action plans to resolve the NPLs of large borrowers.
- Implementing regulations for the Bankruptcy and Private Bailiffs laws should be approved rapidly and out-of-court resolution with a focus on large borrowers should be undertaken expeditiously.

### Supervision of nonbank financial institutions
- Steps have been taken to strengthen nonbank supervision, but weak institutional capacity remains a key challenge (LOI ¶19).
- New regulations on liquidity requirements and asset valuation for investment funds are expected to be fully phased in by mid-2017.
- Investment funds are growing and their portfolios are heavily concentrated in illiquid government securities, increasing urgency to strengthen AFSA’s supervisory capacity and crisis preparedness.
- The increasing role of a single investment fund custodian, a small bank, raises concerns about systemic vulnerabilities.
- Authorities are considering establishing a privately-owned stock exchange to develop capital markets.
- The supervision of nonbank financial institutions needs to be strengthened; efforts are needed to build up capacity and improve crisis preparedness. In developing capital market institutions, the authorities should ensure that high transparency and governance standards are maintained.

### Structural reforms and competitiveness
- In July 2016, parliament passed a judicial reform package to reduce corruption and inefficiency in courts.
- The Tax Procedure Code was amended to simplify the tax regime.
- Fiscal support to the power sector has been reduced from 0.9 percent of GDP in 2014 to a projected 0.1 percent in 2017.
- A financial restructuring of the state-owned electricity companies is underway and arrears to private power producers have been cleared.
- Future electricity reforms will focus on further liberalizing the electricity market, upgrading infrastructure, and strengthening corporate governance.
- Albania has maintained cost competitiveness through a tight wage policy; REER appreciated by around 4 percent since end-2015 and an earlier exchange rate overvaluation of around 10 percent at end-2015 was reported in the last Article IV staff report (May 2016).
- Structural reforms needed: enhance business environment, address infrastructure gaps, improve labor skills, and encourage investment in higher value-added products.

### Program design, financing, and risks
- Given the compressed schedule for the ninth and tenth program reviews, the authorities requested they be combined; controlling test date is end-November 2016.
- Financing remains adequate through 2017:
  - The EBRD is expected to complete a €118 million debt restructuring operation with the state-owned electricity generation company in early 2017.
  - The World Bank is expected to disburse $150 million in development policy loans in early 2017.
  - EU budget support grants related to the accession process are expected to continue over the next few years at around €15 million annually.
- Albania’s repayment capacity on obligations to the Fund in 2017:
  - Fund credit outstanding is estimated to be 3.2 percent of GDP or 13.5 percent of gross reserves in 2017.
  - Debt service to the Fund is expected to peak in 2022 at around 0.4 percent of GDP and 2.7 percent of international reserves.
  - After peaking at around 50 percent of GDP in 2015, external debt will decline to 45 percent of GDP by 2019.
  - External public debt is projected to peak at around 35 percent of GDP in 2017 before falling marginally to around 33 percent of GDP in 2019.
- Policy risks in the post-program period remain high:
  - Next general election due by mid-2017 could create political pressures on fiscal consolidation.
  - Revenue mobilization requires sustained political will and is vulnerable to administrative and technical capacity constraints.
  - Electricity sector reforms are subject to implementation and weather-related risks.
- Risk mitigants:
  - Prospect of EU accession negotiations as a catalyst for reform.
  - Extensive TA by the Fund and other donors to build capacity to manage macroeconomic risks.

### Staff appraisal and policy recommendations
- Program outcomes and achievements:
  - The three-year Extended Arrangement has been successful in achieving its objectives: growth recovery, persistently low inflation, sizable revenue-based fiscal adjustment, reduction in the fiscal deficit, start of public debt decline, lowered refinancing risks, comprehensive pension and electricity sector reforms, and clearing a substantial stock of domestic central government arrears.
  - The conditional recommendation to start EU accession negotiations marks an important milestone.
- Remaining challenges and priorities:
  - Public debt remains high and efficiency of tax collection remains low.
  - NPL overhang continues to deter overall credit growth, particularly among corporates.
  - Main post-program priorities: continue lowering fiscal vulnerabilities, address the NPL overhang, and implement growth-enhancing structural reforms.
- Specific policy recommendations:
  - Steadfast fiscal consolidation in 2017 and beyond to lower public debt to around 60 percent of GDP by end-2019.
    - Under the baseline scenario, this would require measures of around 1 percent of GDP annually.
  - Strengthen public debt management to lower high rollover needs and significant exposure to the domestic banking system.
  - Consolidation strategy should be based on broadening the tax base and improving tax compliance and administration; the strategy will require strong political commitment.
    - Refrain from granting new tax incentives.
    - Urgently implement the action plan to introduce a valuation-based property tax.
    - Modernize tax administration and improve compliance to ensure fiscal consolidation in an efficient and growth-friendly manner.
  - Continue efforts to enhance credibility of the medium-term budgetary framework, improve public investment management, and tackle arrears on unbudgeted investment projects.
    - Resolve the stock of arrears at the local level promptly, without introducing moral hazard.
    - Strengthen the PPP framework.
  - Monetary policy stance:
    - The BoA’s accommodative monetary policy stance is appropriate.
    - Maintain the policy stance as long as inflation expectations remain well-anchored and financial stability concerns are contained.
    - Implement measures to encourage de-euroization gradually with due consideration of disintermediation risks.
  - Central bank independence and supervision:
    - Accelerate work on amending the central bank law to safeguard independence.
    - Strengthen the BoA’s microprudential focus on the fastest-growing and systemically important segments of the banking system.
    - Tackle high NPLs to ease bank risk aversion and revive credit flows.
  - Nonbank sector:
    - Build up AFSA capacity and crisis preparedness.
    - Ensure high transparency and governance standards when developing capital market institutions.

*Source: IMF staff calculations.*

### 43. In light of the progress so far and the authorities’ policy commitments going

### 43. In light of the progress so far and the authorities’ policy commitments going

### Program assessment and IMF recommendations
- Staff supports the completion of the Ninth and Tenth Reviews under the Extended Arrangement.
- Since Albania’s outstanding credit to the Fund exceeds 145 percent of quota, staff recommends that Albania return to the standard 12-month cycle for Article IV consultations.
- Given that outstanding credit to the Fund will exceed quota-based thresholds following drawings on the ninth and tenth review disbursements, it is recommended that Albania engage in Post-Program Monitoring discussions with the Fund after completion of the Extended Arrangement and while outstanding obligations to the Fund exceed 200 percent of quota.

### IMF financing and schedule highlights
- Total scheduled availability under the arrangement: 295.42 (Millions of SDR) and 212.1 (In Percent of Quota).
- Albania's IMF quota is SDR 139.3 million.

### External financing and Balance of Payments (selected items)
- Current account (percent of GDP) projections: -13.0 (2016 Prog.), -12.1 (2017 Proj.), -13.4 (2018 Prog.), -13.7 (2019 Proj.), -13.0 (2016 projection elsewhere), -11.8 (2019 projection elsewhere). 
- Total financing requirement (Millions of Euros):
  - 2016: 1,393
  - 2017: 1,614
  - 2018: 1,661
  - 2019: 1,600
- Major financing sources (Millions of Euros; selected):
  - Foreign direct investment, net: 967 (2017), 883 (2018), 735 (2019)
  - Official medium- and long-term project loans: 201 (2017), 230 (2018), 208 (2019)
  - Official budget support loans (includes IMF): 359 (2017), 171 (2018), 71 (2019)
    - IMF component (Millions of Euros): 144 (2016), 73 (2017), 0 (2018), 0 (2019)
  - Commercial borrowing (Eurobond and PBG): 700 (2015)

### Public debt and fiscal balances (selected indicators)
- General Government Debt (percent of GDP) — examples across projections:
  - 70.4, 72.0, 73.7, 71.9, 72.1, 68.7, 68.6, 64.8, 60.4 (as presented in Table 1 / Table 2a)
- Overall balance (percent of GDP) — headline trajectory (annual sequence shown in source):
  - -5.2, -5.9, -4.6, -2.5, -2.2, -1.6, -1.1, -0.7, -0.1
- Primary balance (percent of GDP) — headline trajectory:
  - -2.0, -3.0, -1.9, 0.2, 0.2, 0.9, 1.2, 1.4, 2.0
- Total revenue and grants (percent of GDP):
  - 24.0, 26.3, 26.3, 27.2, 26.7, 26.6, 27.7, 26.8, 26.7
- Total expenditure (percent of GDP):
  - 29.2, 32.2, 30.9, 29.7, 28.9, 29.3, 28.8, 28.9, 29.1

### Monetary and financial sector (selected)
- Broad money growth (percent change, annual): 2.3, 4.0, 1.8, 2.6, 3.3, 5.4, 5.5, 5.2, 6.5 (as reported across tables)
- Private credit growth (percent change, annual): -1.4, 2.0, -2.8, 2.3, 0.7, 7.0, 5.1, 8.6, 11.0 (as reported)
- Gross international reserves (in millions of euros; end-period where shown):
  - 2,015, 2,192, 2,880, 2,652, 2,900, 2,730, 2,803, 2,708, 2,573 (memoranda across tables)

### IMF exposure and capacity to repay (selected)
- Fund credit outstanding (end of period):
  - In millions of SDRs: 16.4 (2013), 57.7 (2014), 129.3 (2015), 241.5 (2016), 296.8 (2017), 291.7 (2018), 277.3 (2019)
- Fund repurchases and charges (In millions of SDRs; selected future years): 6.2 (2017), 9.6 (2018), 18.8 (2019), 31.5 (2020), 47.6 (2021), 51.7 (2022)
- Fund credit outstanding (In percent of quota; selected): 27.3, 96.1, 215.6, 173.4, 213.0, 209.4, 199.1, 179.2, 147.3, 111.1 (annual series in Table 7)

*Source: IMF staff report and accompanying tables as published in the referenced chapter.*

### 1. The three-year Extended Arrangement has sought to correct large macroeconomic

### 1. The three-year Extended Arrangement has sought to correct large macroeconomic imbalances and increase economic growth, against the backdrop of a weak economic recovery in Europe.

### Background and program objectives
- In 2013, Albania’s GDP growth decelerated to its lowest level in decades.
- Public debt increased by 11 percent of GDP between 2011 and 2013, including a large stock of central government domestic arrears (4.8 percent of GDP at end-2013).
- The government was heavily dependent on the domestic banking sector for financing with bulky short maturities and significant rollover risks; the banking system was foreign-dominated and deleveraging from high government exposure.
- Unsustainable pension system and electricity sector posed heavy burdens on public finances.
- Extended Arrangement objectives: strengthen public finances, maintain financial stability, implement structural reforms focused on reforming the energy sector and improving the business climate.

### Macroeconomic outcomes and projections
- Real GDP growth: 2013: 1.0 percent (actual framework), 2014: 1.8 percent, 2015: 2.6 percent, 2016: 3.4 percent (actual/prel).
- Nominal GDP (billions of lek) — program proposal: 2013: 1,358; 2014: 1,418; 2015: 1,502; 2016: 1,607. Current macro framework (actual/prel/proj): 2013: 1,350; 2014: 1,394; 2015: 1,435; 2016: 1,505.
- GDP deflator (%) — program proposal: 2013: 1.7; 2014: 2.3; 2015: 2.5; 2016: 2.7. Current framework: 2013: 0.3; 2014: 1.4; 2015: 0.3; 2016: 1.4.
- Average CPI inflation (%) — program proposal: 2013: 1.9; 2014: 2.7; 2015: 2.8; 2016: 3.0. Current framework: 2013: 1.9; 2014: 1.6; 2015: 1.9; 2016: 1.3.
- Current account (% of GDP) — program proposal: 2013: -9.0; 2014: -10.3; 2015: -12.4; 2016: -14.8. Current framework: 2013: -10.8; 2014: -12.9; 2015: -10.8; 2016: -12.1.
- Gross international reserves (months of imports) — program proposal: 2013: 4.8; 2014: 4.5; 2015: 4.1; 2016: 4.0. Current framework: 2013: 4.5; 2014: 5.0; 2015: 6.2; 2016: 5.7.
- IMF staff note: nominal GDP in 2016 is projected to be about 6 percent lower than in the program proposal; most forecast error due to downside inflation surprises (lower commodity prices and external disinflationary pressures).
- External financing: international reserves are ample and exceed original program projections, reflecting stronger-than-expected multilateral financing.

### Fiscal outcomes and public finances
- Total revenue and grants (% of GDP) — program proposal: 2013: 24.0; 2014: 25.4; 2015: 26.4; 2016: 27.7. Current framework: 2013: 24.0; 2014: 26.3; 2015: 26.3; 2016: 26.7.
- Tax revenue (% of GDP) — program proposal: 2013: 21.6; 2014: 23.3; 2015: 24.5; 2016: 25.8. Current framework: 2013: 22.0; 2014: 24.1; 2015: 23.7; 2016: 24.3.
- Total expenditure (% of GDP) — program proposal: 2013: 30.1; 2014: 32.1; 2015: 31.3; 2016: 31.1. Current framework: 2013: 29.2; 2014: 32.2; 2015: 30.9; 2016: 28.9.
- Overall balance (% of GDP) — program proposal: 2013: -6.2; 2014: -6.7; 2015: -4.8; 2016: -3.4. Current framework: 2013: -5.2; 2014: -5.9; 2015: -4.6; 2016: -2.2.
- Primary balance (% of GDP) — program proposal: 2013: -2.9; 2014: -3.4; 2015: -0.7; 2016: 0.8. Current framework: 2013: -2.0; 2014: -3.0; 2015: -1.9; 2016: 0.2.
- Fiscal revenue increase: compared to 2013, fiscal revenues have increased by around 2.7 percent of GDP by 2016.
- Overall fiscal balance estimated to have improved by 2.9 percent of GDP between 2013 and 2016 (in line with 2.8 percent projected).
- Primary balance projected to improve by 2.1 percent of GDP between 2013 and 2016, rather than the 3.7 percent originally projected.
- Shortfalls vs. program: introduction of sizable new tax expenditures eroded tax system efficiency; rollout of valuation-based property tax delayed.

### Public debt levels and management
- Public debt (billions of lek) — program proposal: 2013: 957; 2014: 1,016; 2015: 1,069; 2016: 1,106. General government debt (billions of lek) current framework: 2013: 950; 2014: 1,005; 2015: 1,057; 2016: 1,085.
- Public debt (% of GDP) — program proposal: 2013: 70.5; 2014: 71.7; 2015: 71.2; 2016: 68.8. General government debt (current definition) — 2013: 70.4; 2014: 72.0; 2015: 73.7; 2016: 72.1.
- Public debt peaked at around 74 percent of GDP in 2015 and is estimated to have declined in 2016.
- Debt-to-GDP higher than expected due to revisions to nominal GDP and the stock of arrears, and depreciation of the lek and the euro vis-à-vis the U.S. dollar.
- In nominal terms, end-2016 general government debt is projected to be about 2 percent lower than in the program proposal (even though the current definition is broader).
- Rollover risk measures: domestic public debt reduced and average maturity lengthened from 17 months in 2013 to 25 months in 2016; successful rollover of a maturing Eurobond in November 2015.
- Note on definitions: Starting with 2015, general government debt in the current macro framework includes arrears owed by local governments; earlier program proposal did not include these.

### Monetary policy, inflation, and external sector
- Bank of Albania policy rate: lowered by 175 basis points over 2014–16 to 1.25 percent (historical low).
- Inflation undershot the 3 percent target for an extended period.
- High bank risk aversion, weak credit demand, and pervasive euroization limited transmission to lending rates.
- Exchange rate with the euro remained very stable.
- Private sector credit growth (%) — program proposal: 2013: -3.0; 2014: -2.6; 2015: 4.9; 2016: 6.2. Current framework: 2013: -1.4; 2014: 2.0; 2015: -2.8; 2016: 0.7.
- Macroeconomic outlook from authorities: real GDP expected to have grown by 3.4 percent in 2016 (compared with 1.0 percent in 2013); headline inflation averaged 1.3 percent in 2016 and is expected to reach 3 percent by 2018; current account deficit projected around 12 percent of GDP in 2016; FX reserves ample at over 5 months of import cover; real effective exchange rate appreciated by about 4 percent over the last year (relative to text timing).

### Structural reforms and financial sector measures
- Public financial management: commitment control system rolled out across most central government entities; substantial stock of central government domestic arrears mostly cleared within two years (faster than anticipated); small new arrears recurred related to large old unbudgeted investment projects.
- Pension reform: comprehensive pension reform passed in mid-2014 — gradually raises retirement age, separates social assistance from social insurance, aligns benefit and contribution ceilings, and indexes pensions to inflation.
- Electricity sector reform: distribution losses reduced from 45 percent in 2013 to 28 percent in 2016; increased bill collections; arrears to private sector repaid; new power sector law passed in May 2015 to reform market structure and gradually remove commercial users from regulated tariffs; SOE balance-sheet restructuring and grid investments underway.
- Tax administration: GDT adopted new IT system, developed a corporate strategy, created a Risk Management Unit; GDT headquarters undergoing comprehensive restructuring; staffing and capacity issues persist and tax administration is burdened with multiple reform initiatives.
- Local government reform: consolidation into 61 units after mid-2015 local elections; uncovered local government arrears worth at least 0.5 percent of GDP; reform includes fiscal decentralization, transfer of functions and personnel, and new financing sources; draft new law on local finances prepared with USAID and World Bank assistance.

### Financial sector supervision, NPLs, and nonbank regulation
- BoA structural changes: Basel II and a new risk manual implemented in 2015; banking supervision reorganized in 2016; early warning system implemented; coordination with parent supervisors reinforced via European Banking Authority College of Supervisors membership.
- Central bank governance: reforms supported rebuilding credibility after 2014 vault theft and strengthened governance and internal safeguards.
- NPL strategy and outcomes: comprehensive NPL strategy adopted covering supervision, enforcement, debt restructuring, and insolvency; new Bankruptcy Law and amendments to Private Bailiffs Law approved.
- NPL ratio: declined from a peak of 25 percent in September 2014 to around 20 percent in November 2016, mostly due to regulation requiring write-offs of loans spent more than three years in the “loss” category.
- Constraints: banks remain risk-averse due to difficulties in collateral execution; private sector credit growth disappointed relative to program projections.
- Nonbank supervision: new regulations on liquidity requirements and asset valuation for investment funds; amendments to strengthen AFSA’s financial and operational independence, though capacity and staff retention issues persist.

### Structural benchmarks and program implementation status (March 2014–July 2016)
- Arrears clearance and public financial management: multiple benchmarks met at relevant test dates; several implemented with delays (e.g., publication surveys, external audits, IT server rollout, multi-year commitment limits, prioritization report).
- Tax administration benchmarks: IT software install and testing met; corporate strategy, headquarters restructuring plan, Large Taxpayer Office specialization, and other reforms implemented mostly with delays; Risk Management Unit established and auditing tax refunds on a risk basis commenced (some with delay).
- Pension reform: commission established and Council of Ministers approved pension reform strategy (both met).
- Monetary and financial sector benchmarks: multiple benchmarks met (collateral standards, audits submission, MoU amendments, AFSA law amendments, Bankruptcy Law submission); several items implemented with delay (audit committee expert hire, investment fund regulatory amendments).
- Electricity sector benchmarks: quarterly surveys of consolidated arrears and quarterly financial statements for KESh, OST, and OShEE met (with occasional delay in publication).

### Authorities’ assessment and forward commitments (from Letter of Intent)
- Program achievements claimed: correction of large macroeconomic imbalances, boosted growth while maintaining stability; structural primary surplus achieved; debt-related vulnerabilities reduced; gross financing requirements lowered; improved public financial management.
- Continued priorities and commitments:
  - Further fiscal consolidation to ensure debt sustainability.
  - Advance tax administration reforms to broaden the tax base and continue working towards a value-based property tax.
  - Strengthen public financial management to contain fiscal risks and increase efficiency.
  - Tackle large stock of NPLs to strengthen bank balance sheets and enhance credit growth.
  - Advance structural reforms to enhance competitiveness, improve business climate, and increase potential growth.
- Macroeconomic outlook reiterated: growth to pick up to around 4 percent over the medium term driven by FDI, recovery in major trading partners, and structural reforms; current account deficit expected to gradually decline with expanded export capacity and lower import needs of major FDI projects.

*IMF staff report excerpts and Albania authorities’ Letter of Intent, February 8, 2017.*

### 6.      We have implemented most of the structural benchmarks established for the 9

### 6.      We have implemented most of the structural benchmarks established for the 9

### Implementation of structural benchmarks and operational delays
- Most structural benchmarks established for the 9th and 10th reviews were implemented, albeit some with delays (Table 3).
- Local government arrears:
  - Publication of the Q2 quarterly survey of local government arrears and formulation of comprehensive action plans were delayed to October 2016 due to capacity constraints at newly formed local government units.
  - Q3 survey of local government arrears was published on time.
- Fiscal risks and staffing:
  - Recruitment challenges delayed full staffing of the fiscal risks unit at MoF to October 2016.
  - Staff shortages at GDT’s Risk Management Unit postponed pilots for modern compliance risk management to January 2017.
- Valuation-based property tax:
  - Need to build consensus postponed design of valuation formula/methodology and drafting of legislation to October 2016.
  - The benchmark on approval by Parliament of the legislation for a valuation-based property tax was not met.
  - Other preparatory measures were implemented as a prior action (Table 2) to accelerate work on the valuation-based property tax.
- Electricity sector:
  - Q3 quarterly survey of gross consolidated arrears of the electricity sector to the private sector and publication of quarterly financial statements delayed to December.
  - Q4 survey of electricity sector arrears was compiled on time.
  - Removal of medium-voltage consumers from regulated tariff system slowed by need to pass regulations and delays in procuring metering equipment; both 35 kV and 20 kV customers postponed till later in 2017.

### Fiscal policy and structural fiscal reforms — fiscal adjustment and targets
- Fiscal consolidation achievements (2013–2016):
  - Overall fiscal balance improved by around 3 percent of GDP from 2013 to 2016.
  - Primary balance: around 0.2 percent of GDP surplus in 2016, compared to a deficit of 3.0 percent in 2014.
  - Tax revenue rose from 22.0 percent of GDP in 2013 to 24.3 in 2016.
  - Annual rollover requirement declined from 31 percent of GDP in 2013 to 25 percent in 2016.
- 2017 budget targets and measures:
  - Target: general government primary surplus of 0.7 percent of GDP; aim to bring public debt-to-GDP ratio below 70 percent of GDP.
  - Revenue-side measures include:
    - (i) raise oil-related revenues;
    - (ii) broaden base for circulation tax on luxury cars;
    - (iii) introduce pilot projects to increase coverage and improve collections from the property tax;
    - (iv) legislate increases in excise on cigarettes to gradually converge to EU standards;
    - address increasing stock of VAT credits, streamline VAT exemptions for imports of machinery and equipment, and refrain from announcing any tax amnesties or new tax exemptions or preferences without prior consultation with the Fund.
  - Expenditure-side commitments:
    - Permanent savings for recurrent expenditures, leveraging ongoing vacancies in public administration.
    - Modest public wage and pension increases of 7 percent and 3 percent on average, respectively, while containing the wage bill as a percent of GDP to 2016 levels and maintaining the current statutory public sector minimum wage.
    - Budget accommodates costs of structural reforms (strengthening water utilities sector, implementing judiciary reform) and provisions for property compensation related to the communist era.
- Local government fiscal decentralization and arrears:
  - 2017 budget provides more resources to local governments to support fiscal decentralization with improved public financial management.
  - Proceeds from outright transfers, revenue-sharing, and property taxation will be partly used to clear legacy stock of arrears from territorial reorganization in June 2015.
  - Outright transfers will be conditioned on successful clearance of arrears.
  - Government will impose limits on local governments’ ability to carry over grants, restore ministerial oversight of the Regional Development Fund (RDF), and stop new commitment allocations to the RDF.
  - Transition to new decentralization framework to be fully implemented in 2018.
  - Investment projects identified which will be financed contingent on realization of one-off revenues or under-execution of local investment plans.
  - New law on local finances prepared with USAID and the World Bank to improve reporting, tighten monitoring, and provide mechanisms for dealing with financially troubled local governments.
- Use of one-off revenues in 2017:
  - Commitment to use large one-off revenue windfalls for debt reduction in 2017.
  - Target to save proceeds from any one-off revenues not factored in the 2017 budget and currently expected to be worth at least ½ percent of GDP.
  - Commitment to stay within primary expenditure limit envisaged in initial 2017 budget and respect quarterly spending ceilings consistent with this annual target (Table 4).

### Progress on structural fiscal reforms and public investment management
- Achievements:
  - Arrears accumulated before end-2013 were cleared.
  - New commitment control system being rolled out.
  - New organic budget law adopted.
  - Fiscal risks unit established in the Ministry of Finance.
  - Public access to fiscal information improved: publication of investment projects list and inclusion of tax expenditures in budget documentation.
  - GDT installed new IT system, adopted a new risk-based compliance management approach, and is implementing an updated organizational structure.
- Public Investment Management actions and commitments:
  - MoF published list of all projects that the 2017 budget will support, consistent with the Medium Term Budget Framework (MTBF).
  - Multi-year commitment registry now operational after uploading prioritized old contracts and providing multi-year breakdowns as a prior action.
  - Framework agreement for supervision of road project contracts at the Albanian Road Authority (ARA) revised to make it mandatory for supervisors to match annual schedule of physical works with appropriations in the Treasury system.
  - Ministry of Transport (MoT) submitted a five-year financing plan for all prioritized unbudgeted investment projects to the Strategic Planning Committee.
  - Internal audit unit to be established at ARA in 2017.
  - Commitment to fully staff the public investment management unit in MoF by end-March 2017.
  - Beginning with 2017 budget, RDF projects integrated into MTBF, budget cycle, and public investment monitoring framework.
  - Financial inspection report on recent arrears at MoT to be prepared in early 2017.
  - Review and streamline project classification with objective to use new classification system for all projects in the 2018 budget.

### Public-Private Partnerships, tax administration, and property tax reforms
- PPPs:
  - Will clarify PPP Law by amending implementing Council of Ministers Decision to strengthen MoF oversight, integrate PPPs into public investment monitoring, and ensure consistency with Budget Law amendments.
  - Institutional arrangements for monitoring PPPs at MoF and Ministry of Economy clarified.
  - January 2017 launch of a public register of all active PPP projects to publish summaries and contracts (excluding confidential/protected information).
- Tax administration:
  - Risk Management Unit at GDT now fully staffed to identify major compliance risks and develop mitigating strategies.
  - Taxpayer service function upgraded to provide accessible guidance tailored to taxpayer needs and compliance risks via multiple communication channels.
  - Risk parameters for vetting VAT refund requests changed to focus resources on high-risk cases.
  - By mid-2017, GDT will start paying interest to taxpayers for refund payments delayed by circumstances not caused by the taxpayer.
  - Updated GDT corporate strategy and amended Tax Procedure Code to address June 2016 Tax Administration Diagnostic Assessment findings.
  - GDT developed and started implementing a comprehensive plan for revamping collection processes, consolidating debt collection operations, and making use of debt installment and write-off arrangements.
  - By mid-2017, NRC will update taxpayer database based on GDT input and update industry codes in cooperation with GDT and INSTAT.
- Property tax and fiscal cadastre:
  - Commitment to develop a fiscal cadastre to enable introduction of a valuation-based property tax.
  - Prime Minister adopted an action plan and appointed a high-level working group involving all relevant stakeholders.
  - MoU signed between MoF and OShEE for sharing OShEE’s national database of property data.
  - MoUs signed with Tirana, Durres, Korca, and Fier to integrate property tax bills into electricity/water bills and to collect property tax based on area, in accordance with current law.
  - MoU with Kosovo’s MoF on sharing software for their fiscal cadastre.
  - New property tax law will be submitted to Parliament in September 2017, and valuation methodology will be adopted by the Council of Ministers shortly after the law’s passage.

### Fiscal consolidation goals and public financial management strengthening
- Fiscal consolidation target:
  - Aim to reduce public debt to around 60 percent of GDP by end-2019.
  - Pursue steady pace of fiscal consolidation involving 1 percentage point of GDP in effort per year.
- Policy approach:
  - Strategy based on broadening the tax base and strengthening tax administration and compliance.
  - Continue to improve debt management to reduce gross financing needs and systemic risk from sovereign-banking feedback loop.
  - Increase staffing and strengthen capacity at MoF’s debt management unit.
  - Augment public financial management framework by strengthening MTBF, improving public investment management, and implementing commitment control system.

### Monetary and exchange rate policy
- Monetary policy framework and stance:
  - BoA’s monetary policy anchored by an inflation-targeting framework and a fully flexible exchange rate regime.
  - With headline inflation below target and weak core inflation, BoA maintained an accommodative stance, lowering policy rate to a historical low of 1.25 percent.
  - BoA committed to achieving an average annual CPI inflation of 3 percent over the medium term.
  - Exchange rate determined by market forces; BoA undertakes only small pre-announced interventions to achieve FX reserve adequacy target.
  - Commitment to maintain adequate FX buffers.
- Monetary policy transmission:
  - Efforts to reduce euroization in the Albanian banking sector to strengthen transmission.
  - Readiness to adjust monetary policy stance to account for unforeseen shocks to inflation.

### Financial sector stability, NPLs, and supervisory reforms
- Financial sector resilience and reforms:
  - Banking sector stability preserved during stress in Greek-owned banks in 2015.
  - Crisis management framework updated and deposit insurance scheme enhanced.
  - Banking supervision improved via adoption of Basel II framework and new risk manual.
  - BoA strengthened corporate governance: internal audit, external audit committee, adoption of IFRS.
  - Banking system remains well-capitalized, liquid, and profitable.
- Non-performing loans (NPLs):
  - NPLs declined to 18 percent at end-December 2015 from a peak of 25 percent in September 2014, but rose again to around 20 percent in November 2016 due mainly to insolvency of two large companies.
  - Regulatory and legal reforms implemented as part of comprehensive NPL resolution strategy:
    - New Bankruptcy Law adopted.
    - Amendments to Law on the Registration of Immovable Properties, Law on Securing Charges, and Private Bailiffs Law to protect lenders’ rights and strengthen collateral enforcement.
    - Measures adopted to accelerate NPL reduction through out-of-court debt restructuring.
- Strengthening supervision and resolution:
  - New Bank Resolution Law approved to align with EU Bank Recovery and Resolution Directive and clarify supervision and resolution responsibilities.
  - BoA will raise prudential requirements on systemic banks expanding into nonbanking activities, as necessary.
  - Central bank to strengthen monitoring of loans to unhedged borrowers and gradually implement macro-prudential measures to reduce euroization.
- NPL resolution implementation actions:
  - Set up working group between MoF and MoJ to draft bylaws to implement new Bankruptcy Law and amendments to Private Bailiffs Law.
  - Coordination mechanism among BoA, MoF, and GDT established to integrate tax authority into collateral execution and streamline tax treatment of NPLs, NPL sales, and collateral recovered in judicial procedures.
  - MoF, MoJ, and BoA to strengthen framework for out-of-court NPL resolution and issue a joint annual report on progress with NPL resolution action plan.

### Non-bank financial sector development and central bank governance
- Non-bank financial sector:
  - Development of non-bank financial sector is crucial to deepen markets and diversify investment opportunities.
  - Strengthening AFSA is a key priority:
    - AFSA’s toolbox and enforcement powers enhanced.
    - AFSA to monitor stress test results from investment funds per recently approved risk-management regulations.
    - AFSA to encourage competition among investment fund custodians.
    - AFSA to set up crisis management framework for investment funds specifying coordination procedures among funds, custodians, AFSA, and BoA.
    - AFSA to ensure establishment of a privately-owned stock exchange by reputable stakeholders with high transparency, governance, risk management, and capitalization standards.
- Central bank governance:
  - Substantial improvements during 2015–16: new Inspector General appointed; internal audit strengthened; Audit Committee fully operational; BoA adopted IFRS in 2016.
  - Plan to amend central bank law in 2017 to align with European System of Central Banks Statute and incorporate IMF staff recommendations to strengthen institutional and operational independence and improve governance and operations.

### Structural reforms — pensions and electricity sector
- Pensions:
  - Comprehensive pension reform implemented via new law adopted in 2014:
    - Raised retirement age, indexed pensions to inflation, and strengthened alignment of individual benefits with reported incomes.
    - Reversed effects of previous contribution rate cuts and unfunded benefit increases.
    - Pension fund deficits declined from 2.1 percent of GDP in 2013 to 1.8 percent of GDP in 2016.
- Electricity sector:
  - Reforms strengthened finances of electricity SOEs by adjusting tariffs, improving bill collections, reducing distribution losses, and repaying arrears to private power producers.
  - Distribution losses fell from 45 percent in 2013 to 28 percent in 2016.
  - Commitment to reduce distribution losses to 14 percent by 2019 and step up infrastructure investments.
  - Budget allocations to energy sector fell from 0.9 percent of GDP in 2014 to 0.1 percent in 2017.
  - Begun publishing quarterly financial statements for KESh, OST and OShEE.
  - New power law passed in May 2015 reformed market structure and will gradually move commercial users from regulated tariff system to a liberalized market.
  - Further reforms underway to better integrate Albania into regional power markets and improve corporate governance.

*International Monetary Fund — content unit cr1764*

### 23.      The investment climate remains a constraint on Albania’s competitiveness and growth

### 23.      The investment climate remains a constraint on Albania’s competitiveness and growth

### Investment climate and structural reforms
- The authorities are committed to implementing policies that enhance the rule of law, property rights, and private sector confidence.
- Key reforms enacted:
  - July 2016: Parliament passed a judicial reform package including constitutional amendments to reduce endemic corruption and inefficiency in Albanian courts.
  - December 2016: Parliament approved amendments to the Tax Procedure Code to simplify the tax regime.
- Additional commitments:
  - Secure property rights, including advancing the land restitution process.
  - Continued investment in infrastructure to improve Albania’s regional connectivity.
- Policy objective:
  - Removing structural bottlenecks is critical to achieving a higher growth potential for Albania.

### Concluding request to the IMF
- Over the next twelve months the authorities will:
  - Pursue fiscal consolidation.
  - Safeguard financial sector stability.
  - Revive credit growth.
  - Implement growth-enhancing reforms, including ambitious reforms in revenue administration, public financial management, and the electricity and water sectors.
  - Continue policy consultation and dialogue with the Fund.
- Requests to the IMF:
  - Completion of the ninth and tenth reviews under the Extended Arrangement.
  - Purchase of SDR 57.28 million.
- Publication authorization:
  - The authorities authorize publication of the letter and the related IMF staff report on the IMF’s website and on official Albanian government websites, subject to Executive Board approval.

### Quantitative performance criteria and indicative targets (selected figures)
- I. Quantitative Performance Criteria (Act./Prog./Adj. entries shown in table format in source):
  - Floor on net international reserves of the BoA (EUR million): 1463; 1495; 1525; 1539; 1587; 1624; 1601; 1535; 1677; 1402; 1690; 1441; 1694.
  - Ceiling on the increase of Bank of Albania credit to the general government (cumulative from December 2013): -0.1; -0.2; 0.0; 0.0; -0.8; -0.2; -10.7; 0.0; -12.8; 0.0; -11.2; 0.0; -10.7.
- II. Continuous Performance Criteria:
  - Accumulation of new external payment arrears by the general government (EUR million): 0.0; 0.04; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0.
- III. Inflation consultation (12-month percent change in consumer prices):
  - Center point and bands reported, center point examples: 1.9; 1.6; 1.7; 1.3; 2.0; 1.6; 2.1; 3.0; 0.6; 3.0; 1.5; 3.0; 1.7.
- IV. Indicative Targets (selected):
  - Ceiling on subsidies to the energy sector (cumulative): 4.6; 4.6; 4.6; 1.7; 0.0; 2.4; 0.0; 3.2; 0.0.
  - Ceiling on average distribution losses by energy distribution company (OSHEE) (percent, cumulative): 33.2; 31.7; 31.3; 28.6; 30.3; 25.3; 28.1; 25.2; 27.7.
  - Ceiling on contracting nonenergy guarantees (cumulative): 0.0; 2.8; 2.8; 0.6; 0.0.
  - Ceiling on accumulation of central government domestic arrears (cumulative from December 2013): 0.4; 1.1; 0.4; 0.3; 1.1; 1.1; 1.3; 0.0; 2.3; 0.0; 2.5; 0.0; 5; 3.3.
  - Floor on clearance of central government domestic arrears (cumulative): 1.0; 19.1; 25.9; 33.8; 7.6; 14.5; 17.6.
- Memorandum items (selected):
  - New energy guarantees (excluding rollover, cumulative): 4.6; 4.6; 4.6; 1.7; -1.7; 0.0; 2.4; -2.4; 0.0; 3.2; -3.2; 0.0.
  - Privatization receipts (cumulative): 0.001; 0.010; 0.026; 0.035; 0.1; 0.6; 0.9; 0.0; 0.2; 0.4; 0.0; 1.3; 2.6; 0.0; 1.4; 2.7.
  - One-off revenues (cumulative): 4.3; 6.1; 6.1.
  - Total non-grant revenues (cumulative): 126.8; 0.0; 126.1; 258.8; 0.0; 256.6; 361.8; 0.0; 353.8.
  - Project grants (cumulative): 2.6; 5.5; 11.2; 3.2; 0.1; 3.3; 6.2; 0.0; 6.0; 7.8; 1.0; 8.8.

### Prior actions and structural benchmarks (selected)
- Table 2: Prior Actions for Completing the Combined Ninth and Tenth Reviews — All listed prior actions shown as Met in source:
  - Tax Policy prior action: Initiate actions towards introducing a valuation-based property tax by end-2017: Met.
  - Arrears Clearance prior actions: Repay central government arrears to bring stock below 1 billion lek: Met; upload prioritized MoT contracts into multi-year commitment registry: Met; ARA Board to approve establishment of internal audit unit and post vacancies: Met.
- Table 3: Structural Benchmarks — status and remarks (selected):
  - Public Financial Management:
    - Publish report on new arrears accumulation through end-August 2016: Test Date November 15, 2016 — Met.
    - Publish report through end-October 2016: Test Date January 15, 2017 — Met.
    - Publish quarterly survey of local government arrears on MoF’s website: Continuous — Implemented with a delay for Q2; Met on time for Q3.
    - Formulate comprehensive action plans to deal with local government arrears: End-Sep. 2016 — Implemented with a delay.
    - Fully staff the fiscal risks unit at MoF: End-Sep. 2016 — Implemented with a delay.
  - Tax Policy and Administration:
    - List and quantify tax expenditures in annual budget documentation: Continuous — Met.
    - Commence phasing in a modern compliance risk management approach at GDT, starting with two major risk clusters: End-Sep. 2016 — Implemented with a delay.
    - Design valuation formula and draft legislation for a valuation-based property tax: End-Sep. 2016 — Implemented with a delay.
    - Approval by Parliament of legislation for a valuation-based property tax: End-Dec. 2016 — Not met. Other measures taken, as a prior action.
  - Financial Sector:
    - Submit to Parliament amendments to the Civil Procedure Code and Private Bailiffs Law to increase efficiency of litigation, foreclosure, and debt collection: End-Sep. 2016 — Met.
  - Electricity Sector:
    - Prepare quarterly survey of gross consolidated arrears of the electricity sector: Continuous — Implemented with a delay for Q3; Met on time for Q4.
    - Publish quarterly financial statements (balance sheet and income statement) for KESh, OST, and OShEE: Continuous — Implemented with a delay.
    - Start removal of 35 kV medium-voltage consumers from the regulated tariff system: End-Sep. 2016 — Not met.
    - Start removal of 20 kV medium-voltage consumers from the regulated tariff system: End-Dec. 2016 — Not met.

### Fiscal targets for 2017 (Table 4, Billions of leks)
- Quarterly cumulative targets:
  - General government primary modified cash balance (cumulative): Mar 12.0; Jun 19.9; Sep 28.5; Dec 18.9.
  - Ceiling on general government primary expenditure (cumulative): Mar 90.7; Jun 195.1; Sep 297.7; Dec 425.1.
  - Ceiling on gross disbursements of energy guarantees (cumulative, excluding rollover): Mar 0.4; Jun 0.4; Sep 0.4; Dec 0.4.
  - Ceiling on contracting of non-energy guarantees (cumulative): Mar 0.1; Jun 0.2; Sep 0.3; Dec 0.3.
  - Ceiling on the stock of central government domestic arrears: Mar 0.0; Jun 0.0; Sep 0.0; Dec 0.0.
- Memorandum items:
  - Large uncertain one-off revenues (cumulative): Mar 3.3; Jun 7.4; Sep 8.0; Dec 8.3.
  - Privatization receipts (cumulative): Mar 0.0; Jun 0.0; Sep 0.0; Dec 0.0.
  - Project grants (cumulative): Mar 0.0; Jun 0.5; Sep 1.0; Dec 3.0.

### Executive Director statement — selected findings and projections
- General remarks:
  - Program achievements include strengthened fiscal position, modernized public finance management framework, downward path for public debt, pension reform for long-term sustainability, sizable international reserves, and resilient financial system.
  - The EFF contributed to catalyze international financing from private and official partners.
- Recent macroeconomic developments (selected data and projections):
  - Real growth in Q3 2016: 3.1 percent y-o-y.
  - Quarter-on-quarter growth: Q3 0.9 percent; Q2 0.3 percent.
  - Projected growth for 2016: likely increase of 3.4 percent for the whole year.
  - Employment: employment rate rose by 10 percent points during the program period; unemployment rate at 15.2 percent, down by 3.4 percentage points.
  - For 2017, the approved budget assumes growth of 3.8 percent.
  - Current account deficit projection: widen to around 12.6 percent of GDP in the near term, then gradually narrow to below 10 percent in 2020 as oil prices recover.
  - Net FDI: expected to continue as the most important source of finance.
- Fiscal policy and public debt:
  - Inherited stock of commercial arrears amounting to 3.7 percent of GDP repaid in 2 years.
  - Average improvement in the primary balance-to-GDP ratio during the program period: 0.7 percentage points.
  - Public debt decreased in 2016 by -1.6 percent of GDP over the previous year.
  - Public debt projected to approach 60 percent of GDP in 2019.
  - 2017 budget aims to achieve a primary balance of 0.7 percent of GDP.
  - Quarterly ceilings on budget execution agreed to avoid political budget cycle.
- Contingent fiscal risks and PPPs:
  - PPP framework strengthened with a new unit in MoF to review PPPs’ value for money and fiscal risks; MoF has veto power and direct oversight on the Regional Development Fund.
- Tax administration and fiscal reforms:
  - New organizational structure and strategic plan for tax administration; fully staffed risk management unit.
  - VAT refunds processing increasingly automatized; tax refunds paid in 2016 over-performed targets.
  - Fiscal decentralization law to provide municipalities with resources; municipalities’ arrears clearing ongoing.
  - First steps towards introduction of a value based property tax taken as prior action; fiscal cadaster implementation ongoing; new property tax law expected to be enacted in the second half of 2017 according to the Prime Minister’s action plan.
- Monetary policy and financial stability (selected data and forecasts):
  - Inflation: 2.8 percent in January (year not specified in excerpt); authorities’ forecast of average inflation for 2017 is 2.3 percent, up from 1.3 percent in 2016.
  - BoA stance: authorities committed to maintaining accommodative stance at least until end of third quarter of 2017; gradual normalization expected as recovery continues with caution to avoid destabilizing inflation expectations.
  - Credit to the private sector (excluding loan write-offs): in December (year not specified) stood 3.2 percent higher than previous year; credit in domestic currency increased by 10.2 percent in same period.
  - Nonperforming loans ratio: fell from above 25 percent at end-2015 to 18.2 percent (final data for 2016), after a spike due to two large borrowers’ insolvency.

*Italic line omitted by pipeline; content from the IMF staff report and authorities’ letter as provided in the source.*

### 70.5 per cent of NPLs are fully provisioned, with net NPLs at 5.4 percent. This reduction

### 70.5 per cent of NPLs are fully provisioned, with net NPLs at 5.4 percent. This reduction

### Non-performing loans (NPLs) and banking sector performance
- 70.5 per cent of NPLs are fully provisioned.
- Net NPLs at 5.4 percent.
- The reduction reflects the combined effects of the improvement of the economic situation, credit restructuring and non-performing loans write-off from balance sheets.
- During 2016, banking sector liquidity and capitalization indicators remained at high levels and the financial results are positives.
- Credit institutions are asked to elaborate detailed recovery plans for riskier clients.

### De-euroization, foreign exchange reserves, and monetary measures
- The reduction of the euroization of the economy ranks among the very top priorities of the BoA.
- The BoA is envisaging a set of measures on the banks’ liabilities side, including the establishment of different reserve remunerations for euro and lek deposits and higher requirements for highly liquid assets to be held against FX deposits.
- Foreign exchange reserves at the end of January stood at around 3 bn euros, covering slightly below 6 months of imports.
- The monetary authorities consider that additional buffers may be appropriate.
- A schedule of foreign exchange auction purchases for 2017 has been duly and transparently communicated to the market.
- This operation may also contribute to counteract any possible upward pressure on exchange rate coming from the success of the deeuroization strategy, while maintaining a fully market determined exchange rate.

### Regulatory, supervisory, and resolution framework
- The BoA has recently amended the regulatory framework for consolidated supervision of banking and financial groups in order to aligning it with the European regulations and directives and the core principles of the Basel Committee.
- The regulatory and supervisory frameworks have been strengthened by the approval of a new bank resolution law that, in line with the European Bank Recovery and Resolution Directive, foresees the creation of a fund with mandatory contributions from financial institutions for the purpose of covering funding needs in the event of a crisis.

### Legal and structural reforms supporting NPL reduction and broader stability
- A coordinated approach among several Albanian institutions has allowed to successfully implement a fully-fledged strategy for a smooth further reduction of the NPL overhang.
- A very comprehensive legal package has been approved in the second half of 2016. It includes, among other legal instruments, a new bankruptcy law and amendments to the Private Bailiff law and civil procedural code in order to increase the efficiency of the execution process.
- Encouraging advancements in collateral execution have already been observed in recent months, especially for what concerns the transfer of land ownership.
- Structural reforms:
  - The reform of the energy sector is highlighted as a leading example of successful macro critical reform. As a result, a source of fiscal risks has been considerably reduced and the sector’s performance has clearly improved.
  - At the onset of the program, sizeable unbudgeted support to the energy sector was not sufficient to prevent a considerable risk of bankruptcy for the SOEs of electricity sector.
  - Nowadays, the country’s energy balance is positive as a result of the increase of energy production from private hydropower plants and the sensible reduction of distribution losses.
  - Collection rates and revenues have significantly increased, budget allocations in 2017 amount to just 0.1 percent of the GDP, medium term sustainability has been restored, no new intercompany arrears have emerged while increased liquidity has allowed to repay the arrears to independent producers, reducing the existing debt in the sector and contributing to investments needed to further reduce distribution losses.
  - The Power Sector Law has transposed the provisions of the EU Third Energy Package, containing the principles for the liberalization of the electricity market.
  - In July 2016 the Council of Ministers has adopted an action plan for the progressive phasing out of price regulation.
  - The adoption of the judiciary reform has represented a cornerstone of a strengthened institutional framework, substantially improving independence and accountability of justice institutions.
  - The business climate will benefit also from the simplification of procedures introduced by the reform of the Tax Procedures Code and from the recently approved DPL from the WB focused on establishing a friendlier environment for attracting and retaining investors.
  - To improve medium term growth perspectives, the government has launched a reform of the education system, with a focus on vocational training.
  - An ongoing project financed by the EBRD aims to improve railway interconnectivity in the region.

### Final remarks and policy orientation
- Building on these important achievements, our Albanian authorities remain committed to a comprehensive strategy aiming to promote growth and job creation in a context of fiscal and financial stability.
- The engagement with the Fund has provided valuable support to the formulation and implementation of the authorities’ economic policy, thus contributing to the country’s strong performance in recent years.
- Our authorities look forward to continuing their engagement with the Fund in the same constructive spirit of close cooperation that has inspired their relationships so far.

*IMF staff report content.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1764.pdf_