## cr1929-albania-a4

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### Fiscal context and medium-term outlook
- 2018 overall deficit expected to edge up to 2.2 percent of GDP.
- 2019 budget deficit expected: 2.1 percent of GDP (or 1.9 percent on the authorities’ definition).
- Staff projects deficit will hover around 2 percent of GDP in the medium-term absent additional measures.
- Authorities’ updated medium-term budget framework: deficit falling to -1.2 percent of GDP in 2021.
- Staff fiscal-path projection for public debt:
  - 62.3 percent of GDP in 2021
  - 58.4 percent of GDP in 2023
- Authorities expect to reduce debt to just below 60 percent of GDP in 2021.
- Authorities’ end-2021 debt projection assumes a heavy withdrawal from the single treasury account to well below historical levels.

### Tax measures introduced in the 2019 budget
- VAT
  - Reduced 6 percent (rather than 20 percent) rate for certain services provided by classified agro-tourism companies, five-star hotels; and certain advertising services.
  - VAT exemptions for imports of agricultural machinery, raw materials for pharmaceuticals and the processing of foreign goods for re-exports.
- Income tax
  - Withholding tax on dividends: reduction from 15 to 8 percent, including from previous years if declared in 2019.
  - CIT: threshold increase from ALL 8 to 14 million. Reduced rate of 5 percent for agricultural cooperatives and certified agro-tourism entities.
  - PIT: highest income tax bracket (taxed at 23 percent) will increase.
- Excises
  - Duties on cigars and cigarillos will be increased.

### Staff assessment of fiscal stance, revenues, and spending risks
- Staff view: authorities’ revenue projections are overly optimistic.
  - 2019 budget envisages maintaining tax-to-GDP ratio at 2018 level despite recent tax breaks and large pending VAT refunds.
  - Medium-term budget framework relies on additional improvements in revenue administration.
- On spending: medium-term budget envisages containing spending on wages, health care and education, while maintaining capital spending at around 5 percent of GDP.
- Projected general government arrears of 0.6 percent of GDP are included in staff’s projection for 2021; these arrears are not included in the authorities’ numbers.

### Policy implications and recommendations (fiscal consolidation and revenue)
- Accelerate fiscal consolidation to create larger fiscal buffers in good times.
  - Front-loaded adjustment recommended to lower debt in the next few years and avoid potential forced pro-cyclical adjustment later.
  - Upfront consolidation to bolster credibility of fiscal policy and moderate expected increases in financing costs and rollover risks.
- Given limited fiscal buffers, rely on improvements in revenue administration and careful management of capital spending and contingent liabilities (including PPPs).
- Close monitoring of revenue outcomes and contingency planning due to introduced tax measures reducing some rates and broadening exemptions.

### Environmental tax measures and fiscal buffer guidance
- Plastic packaging tax: cut drastically, extended to a wider range of plastic products, and differentiated between imported and domestically produced plastics.
- Authorities project a net gain of 0.3 percent of GDP from the new tax measures.
- Staff assumes a prudent buffer equal to 1 percent of GDP be maintained in the relevant account.
- For 2019 staff advice: seek an additional reduction in the deficit by more than ½ percent of GDP.
- Staff recommended strengthening the fiscal rule by setting targets for the annual primary or overall balance to reduce debt below 60 percent of GDP by 2021 and underpin the legislated target of reducing debt to no more than 45 percent by 2026.

### Revenue policy, tax administration, and cautions on tax changes
- Further consolidation should be achieved through revenue measures: excise-rate indexation, environmental taxation, and broadening of the tax base.
- Recurrent tax policy amendments have overshadowed progress in revenue administration.
  - Improvements: compliance-risk management and information technology systems with Fund assistance.
  - Progress in property tax reform and fiscal cadaster launch expected in January 2019.
- Staff urged authorities to refrain from introducing tax cuts, exemptions or preferential treatments and to consider rolling back those already implemented.
- Changes in tax policy should be infrequent and well-prepared; conduct robust policy analysis before announcing tax changes.
- Prepare a comprehensive medium-term revenue strategy.
- Note: lowering of the VAT threshold in 2018 increased the number of taxpayers by around 30 percent, significantly increasing burden on tax administration and small businesses while revenue gains were minor.
- Introduction of multiple tax thresholds for the CIT may fragment the system and lead to tax arbitrage.

### Government arrears, cash management, and related statistics
- Staff urged urgent address of increased government arrears since 2016; arrears largely related to VAT refunds, central government payments for road construction, and local governments.
- Stock of arrears (Lek million and percent of GDP):
  - Total: 13,121        0.9 (2016); 26,662       1.7 (2017); 24,578.3     1.5 (End Sept 2018)
  - Central Government: 3,680          0.2 (2016); 17,405       1.1 (2017); 17,476.3     1.1 (End Sept 2018)
    - VAT refund arrears: 1,908          0.1 (2016); 11,705       0.7 (2017); 11,340.88   0.7 (End Sept 2018)
    - Other: 1,772          0.1 (2016); 5,700         0.4 (2017); 6,135.4       0.4 (End Sept 2018)
  - Local Government: 9,441          0.6 (2016); 9,257         0.6 (2017); 7,102.0       0.4 (End Sept 2018)
- Prevention and control of arrears requires:
  - Strengthening revenue forecasting (including VAT refunds) and cash management.
  - Improving commitment controls, particularly by the Road Authority.
  - Improve cash forecasting and manage government resources in a more integrated and cost-efficient manner.
  - Maintain issuance of three-months T-bills (last issuance December 2017) to support money market development and BOA liquidity management.

### Infrastructure, PPPs, and fiscal risks
- Infrastructure gap: capital spending prioritized and maintained at 5 percent of GDP.
- Rapid increase in PPPs has raised fiscal risks:
  - Existing stock of PPPs: 31 percent of GDP (covering more than 220 projects, including concessions in energy of more than 23 percentage points).
  - 2019 budget foresees a pipeline of potential new PPPs capped at 15 percentage points of GDP.
  - Annual PPP-related government spending projected to remain below legal limit of 5 percent of tax revenues, leaving little room for additional government-funded PPPs once contingent liabilities are incorporated.
- Staff recommendations:
  - Amend PPP legislation to enhance Ministry of Finance and Economy’s gatekeeper role.
  - Halt acceptance of unsolicited PPP proposals and ensure competitive bidding for all projects.
  - Consolidate decision-making and strengthen public investment management unit (including PPP management).
  - Carefully assess contingent liabilities and account for fiscal, financial and governance risks if establishing a development bank.

### Energy sector fiscal risks and recommendations
- Energy sector vulnerabilities:
  - Need to implement planned reforms guided by a five-year financial recovery plan prepared with World Bank support.
  - Reforms require timely decisions on governance of public energy-sector companies, pricing that ensures cost recovery, and contingency planning to deal with droughts.
- VAT refund arrears major contributor: largest chunk of arrears reflects delayed VAT refunds to three large energy projects; promised payment by first quarter of 2020.

### Key fiscal policy recommendations (summary)
- Accelerate fiscal consolidation to reach 60 percent of GDP public debt by 2021; aim for an additional reduction in the 2019 deficit by more than ½ percent of GDP.
- Strengthen the fiscal rule by setting annual primary or overall balance targets to underpin medium-term debt objectives.
- Prioritize revenue-based consolidation: excise-rate indexation, environmental taxes, broadening VAT and other tax bases, and avoid ad-hoc cuts/exemptions.
- Maintain prudent buffer of 1 percent of GDP in the relevant account as a first-line buffer against rollover risks.
- Address government arrears urgently by strengthening revenue forecasting, cash management, and commitment controls.
- Continue issuance of three-month T-bills to develop the money market and support BOA liquidity management.
- Consolidate public investment decision-making, strengthen PPP gatekeeping, halt unsolicited PPPs, and assess contingent liabilities thoroughly.
- Implement energy sector rehabilitation reforms, ensure cost-recovering pricing, and prepare contingency plans for droughts.
- Enhance fiscal risk statements in budgets with broader coverage and mitigation plans.

### External Sector Assessment — overall findings and risks
- External position assessed as moderately weaker than implied by fundamentals and desirable policy settings.
- EBA-Lite results:
  - current account gap: -1.3 percent
  - REER overvaluation: about 5 percent
- 2017 current account deficit: 7.5 percent of GDP (lowest in the past decade).
- 2018 projected current account deficit: 6.2 percent of GDP.
- NIIP increased to -48 percent of GDP in mid-2018 from -42 percent of GDP in 2014.
- Foreign liabilities: 102 percent of GDP (slightly more than half stable FDI liabilities; other liabilities mostly long-term concessional public debt).
- Significant external financing needs and large negative NIIP pose risks; mitigants include predominance of FDI flows and official financing.
- Reduction of external imbalances will hinge on efforts to increase domestic saving.

### REER, reserves, and external financing
- Since beginning of 2017 CPI-based REER appreciated by about 9 percent.
- External financing needs: 13 percent of GDP in 2017.
- Gross FX reserves: 26 percent of GDP at end-2017 and 181 percent of the ARA metric at end-2017.
- Reserve coverage above 150 percent upper threshold for floating regimes; issuance of a €500 million Eurobond increased reserves in 2018.
- Reserves expected to decline gradually through medium-term as de-euroization plans progress and FX debt is repaid.
- Net FDI in 2017 about 8 percent of GDP, covering more than 100 percent of the current account deficit.

### EBA-Lite and diagnostic numbers (selected)
- Current Account approach (EBA-Lite):
  - CA norm: -5.2 percent
  - underlying CA balance: -6.4 percent of GDP
  - current account gap: -1.3 percent of GDP
  - REER gap: 4.6
- External sustainability approach:
  - CA norm: -4.8
  - adjusted actual current account: -6.4
  - current account gap: -1.6
  - REER gap: 5.9
- REER approach:
  - REER gap: 0.0
  - REER elasticity: -0.27
- Staff excludes approximately one-third of excess FDI (primarily large energy projects) to arrive at adjusted underlying CA deficit of -6.4 percent.

### External debt outlook and DSA highlights
- External debt peaked at around 63 percent of GDP in 2017; expected to decline to 45 percent by 2023.
- External private borrowing expected to fall from about 23 to 15 percent of GDP by 2023.
- Authorities issued a seven-year, €500 Eurobond in October 2018 and used €200 million to retire part of the €450 2015 Eurobond.
- Planned issuances: €500 Eurobond in 2020 to rollover remaining 2015 bond maturity, and another €500 Eurobond in 2022.
- Public and private external debt service expected to increase from 7 percent to 9 percent of GDP in 2018, and then rise to 9 percent again in 2020.
- Commercial debt as percent of total PPG debt: 28 percent in 2018; expected to increase to 36 percent in 2022 before declining.

### DSA baseline selected figures
- Nominal gross public debt (percent of GDP): 2016: 62.6; 2017: 73.2; 2018: 71.8; 2019: 70.5; 2020: 66.9; 2021: 65.2; 2022: 62.3; 2023: 60.7
- Public gross financing needs (percent of GDP): 2016: 39.1; 2017: 28.3; 2018: 25.0; 2019: 22.5; 2020: 21.0; 2021: 23.6; 2022: 21.5; 2023: 22.5
- Real GDP growth (percent): 2016: 3.3; 2017: 3.4; 2018: 3.8; 2019: 4.0; 2020: 3.7; 2021: 3.9; 2022: 3.9; 2023: 4.0
- Inflation (GDP deflator, percent): 2016: 2.4; 2017: -0.5; 2018: 1.4; 2019: 1.9; 2020: 2.1; 2021: 2.4; 2022: 2.8; 2023: 2.9
- Effective interest rate (percent): 2016: 5.6; 2017: 3.6; 2018: 3.1; 2019: 3.5; 2020: 3.5; 2021: 3.8; 2022: 4.0; 2023: 4.2
- Change in gross public sector debt (percent of GDP): 2016: 1.9; 2017: -0.5; 2018: -1.4; 2019: -1.3; 2020: -3.6; 2021: -1.7; 2022: -2.9; 2023: -1.6; Cumulative (2018–2023): -13.4
- Primary balance (percent of GDP): 2016: 1.6; 2017: -0.2; 2018: -0.1; 2019: 0.0; 2020: -0.1; 2021: -0.1; 2022: 0.0; 2023: -0.1; Cumulative (2018–2023): -0.5

### Stress test scenarios and results
- 30 percent exchange rate depreciation shock:
  - External debt would peak at 79 percent of GDP in 2019; decline to 66 percent by 2023.
- Shock to the current account of half a standard deviation (around 2 percent of GDP):
  - External debt would peak at 56 percent of GDP in 2019; decline to 53 percent by 2023.
- Depreciation shocks amplify debt dynamics given increased external commercial borrowing.
- Albania’s ample reserve buffers should mitigate disorderly FX market conditions.

### External Debt Sustainability Framework (selected table highlights)
- Baseline external debt (percent of GDP): 2013: 60.5; 2014: 56.1; 2015: 63.0; 2016: 61.9; 2017: 63.2; 2018: 55.5; 2019: 54.6; 2020: 52.9; 2021: 49.3; 2022: 48.7; 2023: 45.4
- Current account deficit, excluding interest payments (percent of GDP): 2013: 8.9; 2014: 9.5; 2015: 7.0; 2016: 6.0; 2017: 6.4; 2018: 5.0; 2019–2023 baseline: 5.0, 4.7, 4.6, 4.6, 4.7
- External debt-to-exports ratio (percent): 2013: 209.1; 2014: 198.7; 2015: 231.2; 2016: 213.9; 2017: 200.3; 2018: 177.5; 2019: 176.5; 2020: 168.9; 2021: 157.5; 2022: 155.8; 2023: 144.7

### Growth-at-Risk (GaR) model — specification and key findings
- Model fits Albania’s one-year-ahead growth on five PCA-derived regressors and an autoregressive term; quantile regressions estimated for q in {5%, 10%, 25%, 50%, 75%, 90%, 95%}.
- Regressors/partitions: Domestic Financial Conditions; Domestic Leverage; Main Trading Partners Macro Conditions; Euro Area Financial Conditions; World Financial Conditions.
- Key empirical findings:
  - A 1 standard deviation deterioration in main trading partners lowers median and 10th percentile GDP growth one-year ahead by 0.7 standard deviation.
  - Trading partners’ coefficient is 6 times larger than euro area financial conditions and 7 times larger than domestic financial conditions in normal times.
  - Domestic leverage has an amplified adverse impact in bad times: coefficient in the 10th percentile is 0.48 (1-standard deviation increase in leverage lowers the 10th percentile growth one-year ahead by 0.48 standard deviation).
- Counterfactual 2 standard deviation shocks (selected impacts on median vs. 10th percentile and probability growth <2%):
  - Weaker main trading partners: impact -1.6 p.p.; -1.7 p.p.; probability growth <2%: 3%; 43%
  - Sharp tightening in Euro Area: impact -0.9 p.p.; -1.0 p.p.; probability growth <2%: 3%; 20%
  - Financial turmoil in key partner: impact -1.1 p.p.; -1.8 p.p.; probability growth <2%: 3%; 25%
  - Increase in leverage: impact -0.4 p.p.; -2.0 p.p.; probability growth <2%: 3%; 16%
- Magnitude statement: worst shocks could cost on average 1.8–2 p.p. GDP growth.

### Arrears — drivers, composition and management shortcomings
- New central government arrears uncovered in 2013 totaled 4.8 percent of GDP.
- Local government arrears end-2015 about 0.8 percent of GDP.
- New government arrears emerged in 2017; stock estimated at 1.5 percent of GDP at end-September 2018.
- Composition shift: VAT refund arrears represented 67 percent of central government past due obligations in 2017 (compared with 17 percent in 2014); around 70 percent of total VAT arrears related to three large taxpayers involved in big investment projects.
- Root causes:
  - Revenue forecasting: tax revenues underperformed plan by close to 1.5 percent of GDP on average over last 10 years; VAT projections overly optimistic and do not fully account for VAT refunds.
  - Cash forecasting and management: treasury plans use monthly expenditure limits/targets rather than proper cash forecasts.
  - Weak commitment control for public investment projects; multiyear contracts entered with inadequate outer-year provisioning; multiyear commitment control not fully rolled out for Albanian Road Authority (ARA).
- Recommended measures to prevent/control arrears:
  - Ensure realistic revenue projections.
  - Improve cash forecasting and coordination between cash and debt management.
  - Pay legitimate tax refunds promptly.
  - Improve transparency in procurement and introduce binding annual and multi-year commitment limits (including in ARA).
  - Strengthen financial oversight of fiscal risks and publish stock of arrears regularly.

### Fiscal policy, monetary policy, and structural reforms (selected)
- 2019 budget targets a deficit of 1.9 percent of GDP (described as the lowest targeted level in the last two decades).
- Budget measures include new tax measures, improvements in tax-administration, contained total expenditures, and accommodating high capital expenditures.
- Capital spending kept at 5 percent of GDP; budget allocates more resources to education.
- Monetary policy: BoA lowered policy rate to 1 percent in June 2018 (25 basis points cut); accommodative stance maintained.
- Credit: private credit grew by 4.9 percent in Q3 net of exchange rate effects and loan write-offs.
- Banking sector: NPLs decreased to 12.7 percent of total loans in November 2018 (from close to 25 percent in 2014); NPL ratios below 10 percent recorded in most banks.
- Structural reforms: judicial vetting (>100 judges vetted); energy sector five-year recovery plan with World Bank; Doing Business ranking improved from no. 120 in 2007 to no. 63 in 2018.

*Source: IMF staff chapter content as supplied in the provided document.*

### 1. Tax Measures in the 2019 Budget _____________________________________________________________ 10

### 1. Tax Measures in the 2019 Budget

### Fiscal context and outlook
- The fiscal stance is expected to be broadly neutral in 2018, with the overall deficit edging up to 2.2 percent of GDP.
- The budget for 2019 is expected to result in a deficit of 2.1 percent of GDP (or 1.9 percent on the authorities’ definition).
- Staff projects that in the absence of additional measures the deficit will hover around 2 percent of GDP in the medium-term.
- Authorities’ updated medium-term budget framework shows the deficit falling to -1.2 percent of GDP in 2021.
- Staff fiscal-path projection: debt will remain high at 62.3 percent of GDP in 2021 and 58.4 percent in 2023.
- Authorities expect to reduce debt to just below 60 percent of GDP in 2021.
- The authorities’ debt projection for end-2021 assumes a heavy withdrawal at that time from the single treasury account to well below historical levels.

### Staff assessment of fiscal stance and risks
- Staff considers the authorities’ revenue projections to be overly optimistic.
  - Notwithstanding recently introduced tax breaks and large pending VAT refunds, the budget for 2019 envisages maintaining the tax-to-GDP ratio at the level of 2018.
  - The medium-term budget framework relies on additional improvements in revenue administration as a source of higher revenue.
- On spending, the medium-term budget envisages containing spending on wages, health care and education, while maintaining capital spending at around 5 percent of GDP.
- Projected general government arrears of 0.6 percent of GDP are included in staff’s projection for 2021; these arrears are not included in the authorities’ numbers.

### Tax policy measures introduced in the 2019 budget (Box 1)
- VAT
  - A reduced 6 percent (rather than 20 percent) rate will apply to certain services provided by classified agro-tourism companies, five-star hotels; and certain advertising services.
  - Imports of agricultural machinery, raw materials for pharmaceuticals and the processing of foreign goods for re-exports will be exempted from VAT.
- Income tax
  - Withholding tax on dividends: a reduction from 15 to 8 percent, including from previous years if declared in 2019.
  - CIT: the threshold will increase from ALL 8 to 14 million. A reduced rate of 5 percent will apply to agricultural cooperatives and certified agro-tourism entities.
  - PIT: the highest income tax bracket (taxed at 23 percent) will increase.
- Excises
  - Duties on cigars and cigarillos will be increased.

### Policy implications and recommendations
- Further fiscal consolidation is recommended to create larger fiscal buffers in good times.
  - A front-loaded adjustment would help lower debt in the next few years and avoid a potential forced pro-cyclical adjustment later on under less favorable conditions.
  - Upfront consolidation would bolster the credibility of fiscal policy and could moderate expected increases in financing costs and rollover risks as financial conditions tighten.
- Given limited fiscal buffers, reliance on improvements in revenue administration and careful management of capital spending and contingent liabilities (including PPPs) is important to reduce vulnerabilities.
- The introduced tax measures (Box 1) reduce some tax rates and broaden exemptions; staff’s view that revenue projections are optimistic suggests close monitoring of revenue outcomes and contingency planning are warranted.

*International Monetary Fund staff summary based on "1. Tax Measures in the 2019 Budget".*

### 4. Environmental tax. The tax on plastic packaging will be cut drastically, but extended to a wider

### 4. Environmental tax. The tax on plastic packaging will be cut drastically, but extended to a wider

### Environmental tax measures and fiscal impact
- The tax on plastic packaging will be cut drastically, but extended to a wider range of plastic products, and differentiated between imported and domestically produced plastics.
- The authorities project a net gain of 0.3 percent of GDP from the new tax measures.

### Fiscal buffers and consolidation guidance
- Staff assumes that a prudent buffer will be maintained in this account equal to 1 percent of GDP, in line with historical levels, and offering a first-line buffer against rollover risks.
- Staff advised that fiscal consolidation should be accelerated to create adequate room for fiscal policy maneuver and to achieve the authorities’ objective of reducing public debt to 60 percent of GDP by 2021 in a sustainable manner.
- Absent significant progress, confidence of financial markets will be fragile.
- For 2019, fiscal policy should seek an additional reduction in the deficit by more than ½ percent of GDP.
- To lock in the path for further consolidation and support the credibility of the fiscal framework, staff recommended strengthening the fiscal rule by setting targets for the annual primary or overall balance to reduce debt below 60 percent of GDP by 2021 and underpin the legislated target of reducing debt to no more than 45 percent by 2026.

### Revenue policy, tax administration, and tax-change cautions
- Staff advised that further consolidation should be achieved through revenue measures, including a mix of excise-rate indexation, environmental taxation, and further broadening of the tax base.
- Recurrent tax policy amendments have overshadowed ongoing progress in revenue administration.
  - Improvements made in compliance-risk management and information technology systems, with Fund assistance.
  - Progress in property tax reform and a fiscal cadaster launch expected in January 2019.
- Staff urged authorities to refrain from introducing tax cuts, exemptions or preferential treatments and consider rolling back those already implemented.
- Changes in tax policy should be infrequent and well-prepared; before announcing tax changes, authorities should conduct robust policy analysis to assess revenue, economic, and distributional impact.
- Staff advised preparing a comprehensive medium-term revenue strategy.
- The lowering of the VAT threshold in 2018 increased the number of taxpayers by around 30 percent, significantly increasing the burden on tax administration and small businesses, while revenue gains were minor.
- Introduction of multiple tax thresholds for the CIT may fragment the system and lead to tax arbitrage.

### Government arrears and cash/debt management
- Staff urged the authorities to address the increase in government arrears since 2016 without delay. Budgetary arrears—mostly related to VAT refunds, central government payments for road construction, and local governments—have posed a perennial problem.
- Stock of arrears (Lek million and percent of GDP):
  - Total: 13,121        0.9 (2016); 26,662       1.7 (2017); 24,578.3     1.5 (End Sept 2018)
  - Central Government: 3,680          0.2 (2016); 17,405       1.1 (2017); 17,476.3     1.1 (End Sept 2018)
    - VAT refund arrears: 1,908          0.1 (2016); 11,705       0.7 (2017); 11,340.88   0.7 (End Sept 2018)
    - Other: 1,772          0.1 (2016); 5,700         0.4 (2017); 6,135.4       0.4 (End Sept 2018)
  - Local Government: 9,441          0.6 (2016); 9,257         0.6 (2017); 7,102.0       0.4 (End Sept 2018)
- Prevention and control of arrears requires strengthening revenue forecasting (including of VAT refunds) and cash management, and improving commitment controls, particularly by the Road Authority.
- Building fiscal buffers requires significant improvements in cash and debt management:
  - Need to improve cash forecasting and manage government resources in a more integrated and cost-efficient manner.
  - While progress made in lengthening public debt maturity, staff strongly advised maintaining issuance of three-months T-bills; the last issuance occurred in December 2017, limiting money market development and complicating BOA liquidity management.

### Infrastructure, PPPs, and fiscal risks
- Albania has a serious public infrastructure gap. To address this, authorities have prioritized capital spending, which is maintained at 5 percent of GDP, and accelerated the use of PPPs.
- Despite some progress, appraisal and selection of investment projects continues to be fragmented depending on funding source; staff recommended consolidating decision-making processes and strengthening the public investment management unit (including PPP management).
- The government is considering establishing a development bank to support public investments; staff advised accounting for international experience and fiscal, financial and governance risks.
- Rapid increase in PPPs has raised fiscal risks:
  - Existing stock of PPPs of 31 percent of GDP (covering more than 220 projects, including concessions in energy of more than 23 percentage points).
  - The 2019 budget documents foresee a pipeline of potential new PPPs capped at 15 percentage points of GDP.
  - Staff welcomed planned amendments to PPP legislation to enhance the Ministry of Finance and Economy’s gatekeeper role and recommended halting acceptance of unsolicited PPP proposals and ensuring competitive bidding for all projects.
  - Annual PPP-related government spending is projected to remain below the legal limit of 5 percent of tax revenues, but this ceiling leaves little room for additional government-funded PPPs once contingent liabilities are incorporated.
- Containing fiscal risks requires improving energy sector performance:
  - Staff advised implementing planned reforms guided by a five-year financial recovery plan prepared with World Bank support.
  - Reforms need timely decisions on governance of public energy-sector companies, pricing that ensures cost recovery, and contingency planning to deal with droughts.
- Staff welcomed inclusion of a fiscal risk assessment in recent budgets but advised enhancing the depth and coverage, extending analysis to a wider range of risks and a more granular analysis of large contingent liabilities (state-owned utilities, local governments, PPP contracts), and outlining mitigation policies.

### Key policy recommendations (summary)
- Accelerate fiscal consolidation to reach 60 percent of GDP public debt by 2021; aim for an additional reduction in the 2019 deficit by more than ½ percent of GDP.
- Strengthen the fiscal rule by setting annual primary or overall balance targets to underpin medium-term debt objectives.
- Prioritize revenue-based consolidation: excise-rate indexation, environmental taxes, broadening VAT and other tax bases, and avoid ad-hoc cuts/exemptions.
- Maintain prudent buffer of 1 percent of GDP in the relevant account as a first-line buffer against rollover risks.
- Address government arrears urgently by strengthening revenue forecasting, cash management, and commitment controls.
- Continue issuance of three-month T-bills to develop the money market and support BOA liquidity management.
- Consolidate public investment decision-making, strengthen PPP gatekeeping, halt unsolicited PPPs, and assess contingent liabilities thoroughly.
- Implement energy sector rehabilitation reforms, ensure cost-recovering pricing, and prepare contingency plans for droughts.
- Enhance fiscal risk statements in budgets with broader coverage and mitigation plans.

*Italic: Source — IMF staff chapter content as supplied in the provided document.*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Overall assessment
- The external position is assessed as moderately weaker than implied by fundamentals and desirable policy settings.
- EBA-Lite results indicate:
  - current account gap of -1.3 percent
  - real effective exchange rate (REER) overvaluation of about 5 percent.
- Significant external financing needs and a large negative NIIP pose risks, mitigated in part by predominance of FDI flows and official financing.
- Reduction of external imbalances will hinge on efforts to increase domestic saving.
- Structural weaknesses—governance concerns, infrastructure gaps, and skills shortages—hamper transition to export-led growth.

### Current account dynamics
- 2017:
  - current account deficit declined to 7.5 percent of GDP (lowest in the past decade).
  - improvement led by strong growth of tourism, back office services and remittances.
  - slight deterioration of trade deficit due to increased electricity imports caused by prolonged drought.
- 2018:
  - significant rains returned early 2018 supporting surge of electricity exports.
  - projected narrowing of current account deficit to 6.2 percent in 2018.
- Medium-term outlook:
  - deficit expected to fall further as imports generated from FDI in large energy projects, especially the Trans-Adriatic Pipeline (TAP), decline as projects end and domestic energy production expands.
  - vulnerability due to reliance on hydropower and dependence on Italy and Greece as export destinations.

### Real exchange rate and nominal exchange rate developments
- Since beginning of 2017:
  - CPI-based REER appreciated by about 9 percent.
  - appreciation reflects price differentials vis-à-vis trading partners and pronounced nominal exchange rate appreciation.
  - nominal appreciation supported by robust FDI flows and idiosyncratic factors since beginning of 2018 (lumpy donor disbursements; conversion of commercial bank capital from euro to lek).
  - lek-euro exchange shifted decisively out of the 2 percent band in which it had moved between 2011–15.

### Net international investment position (NIIP)
- NIIP:
  - increased to -48 percent of GDP in mid-2018 from -42 percent of GDP in 2014.
  - driven by FDI inflows and external borrowing.
- Foreign liabilities:
  - reached 102 percent of GDP.
  - slightly more than half comprised stable FDI liabilities.
  - other liabilities were mostly long-term concessional public debt.
- Medium-term concern:
  - liability profile may become less favorable as FDI inflows related to large energy projects taper off and authorities increase commercial borrowing.

### EBA-Lite and other diagnostic approaches
- Current Account approach (EBA-Lite):
  - CA norm: -5.2 percent
  - underlying CA balance: -6.4 percent of GDP (adjusted underlying CA excludes portion of imports financed by excess FDI)
  - current account gap: -1.3 percent of GDP
  - REER gap (EBA-Lite): 4.6
- External sustainability approach:
  - CA norm: -4.8
  - adjusted actual current account: -6.4
  - current account gap: -1.6
  - REER gap: 5.9
- REER approach:
  - REER gap reported as 0.0 (REER approach indicates broadly consistent with fundamentals but has weak predictive power for Albania)
  - REER elasticity: -0.27
- Staff note:
  - Albania’s FDI inflows have been in range of 7–10 percent of GDP, higher than EBA-Lite sample average of 4½ percent.
  - Staff excludes approximately one-third of excess FDI (primarily large energy projects) to arrive at adjusted underlying CA deficit of -6.4 percent.
- Outlook:
  - overvaluation expected to resolve over time with fiscal adjustment and productivity growth supported by structural reform.

### External financing needs and reserves
- External financing needs:
  - 13 percent of GDP in 2017.
- Gross FX reserves:
  - 26 percent of GDP at end-2017
  - 181 percent of the ARA metric at end-2017
  - reserve coverage above 150 percent upper threshold for floating regimes; considered appropriate given substantial euroization and large FX deposits held by domestic banks.
- 2018 developments:
  - reserve coverage increased with issuance of a €500 million Eurobond.
  - reserves expected to decline gradually through medium-term as de-euroization plans progress and FX debt is repaid.
- Net FDI:
  - in 2017 net FDI stood at about 8 percent of GDP, covering more than 100 percent of the current account deficit.
- Medium-term risk:
  - as import-intensive energy projects complete and 2015 and 2018 Eurobonds are amortized, ability to attract new FDI and rollover debt will be increasingly important.

### Investment climate and structural constraints
- Improvements noted but Albania trails regional peers.
- Structural deficiencies:
  - weak institutions (especially judiciary)
  - infrastructure deficiencies
  - excessively complex tax system
  - limited access to finance
  - shortage of skilled labor
- Consequences:
  - low wages are an advantage, but low productivity—partly due to skills shortages—impedes transition to higher value-added production.

### Key statistics and indices (as presented)
- Gross reserves (Percent of ARA Metric, 2017):
  - Albania: 181%
  - Moldova: 171%
  - Bulgaria: 170%
  - Romania: 158%
  - Bosnia and Herzegovina: 144%
- External Sector Assessment Summary Table (Percent of GDP):
  - EBA-Lite (Current account approach):
    - Current account-Norm: -5.2
    - Adjusted actual current account: -6.4
    - Current account gap: -1.3
    - REER gap: 4.6
  - External sustainability approach:
    - Current account-Norm: -4.8
    - Adjusted actual current account: -6.4
    - Current account gap: -1.6
    - REER gap: 5.9
  - REER approach:
    - REER gap: 0.0
  - REER elasticity: -0.27

*Source: IMF staff calculations and Annex I. External Sector Assessment*

### 11.      The external debt ratio peaked in 2017 and is expected to decline gradually over the

### 11.      The external debt ratio peaked in 2017 and is expected to decline gradually over the

### External debt outlook and composition
- External debt is estimated to have peaked at around 63 percent of GDP in 2017.
- External debt is expected to decline to 45 percent by 2023.
- External private borrowing is expected to fall from about 23 to 15 percent of GDP over the same period.
- FDI-related debt liabilities will likely remain the largest component of the private external debt stock, even as accumulation slows with tapering investment in large energy projects (such as the Trans Adriatic Pipeline).
- The authorities issued a seven-year, €500 Eurobond in October 2018 and used €200 million to retire a portion of the €450 2015 Eurobond.
- Authorities are planning to issue a €500 Eurobond in 2020 to rollover the remaining maturity of the 2015 bond, and another €500 Eurobond in 2022.
- Public and private external debt service is expected to increase from 7 percent to 9 percent of GDP in 2018 (consistent with the partial buyback of the 2015 Eurobond), and then rise to 9 percent again in 2020 as the remaining 2015 Eurobond is amortized.
- Commercial debt as a percentage of total PPG debt is expected to increase from 28 percent in 2018 to 36 percent in 2022, before declining gradually thereafter as outstanding commercial debt is repaid.

### Stress test results and vulnerabilities
- Under a 30 percent exchange rate depreciation shock:
  - External debt would peak at 79 percent of GDP in 2019.
  - External debt would decline to 66 percent by 2023.
- Following a shock to the current account of half a standard deviation (around 2 percent of GDP):
  - External debt would peak at 56 percent of GDP in 2019.
  - External debt would gradually decline to 53 percent by 2023.
- Depreciation shocks have added significance for debt dynamics given increased external commercial borrowing.
- Albania’s ample reserve buffers should help mitigate disorderly foreign exchange market conditions.

### Public DSA — baseline scenario (selected figures and dynamics)
- Nominal gross public debt (percent of GDP):
  - 2016: 62.6
  - 2017: 73.2
  - 2018: 71.8
  - 2019: 70.5
  - 2020: 66.9
  - 2021: 65.2
  - 2022: 62.3
  - 2023: 60.7
  - (table also shows 58.4 in a following column)
- Public gross financing needs (percent of GDP):
  - 2016: 39.1
  - 2017: 28.3
  - 2018: 25.0
  - 2019: 22.5
  - 2020: 21.0
  - 2021: 23.6
  - 2022: 21.5
  - 2023: 22.5
- Real GDP growth (in percent):
  - 2016: 3.3
  - 2017: 3.4
  - 2018: 3.8
  - 2019: 4.0
  - 2020: 3.7
  - 2021: 3.9
  - 2022: 3.9
  - 2023: 4.0
- Inflation (GDP deflator, in percent):
  - 2016: 2.4
  - 2017: -0.5
  - 2018: 1.4
  - 2019: 1.9
  - 2020: 2.1
  - 2021: 2.4
  - 2022: 2.8
  - 2023: 2.9
- Effective interest rate (in percent) (defined as interest payments divided by debt stock at end of previous year):
  - 2016: 5.6
  - 2017: 3.6
  - 2018: 3.1
  - 2019: 3.5
  - 2020: 3.5
  - 2021: 3.8
  - 2022: 4.0
  - 2023: 4.2
- Change in gross public sector debt (percent of GDP):
  - 2016: 1.9
  - 2017: -0.5
  - 2018: -1.4
  - 2019: -1.3
  - 2020: -3.6
  - 2021: -1.7
  - 2022: -2.9
  - 2023: -1.6
  - Cumulative (2018–2023): -13.4
- Identified debt-creating flows (cumulative, 2018–2023): -9.8
- Primary balance (percent of GDP):
  - 2016: 1.6
  - 2017: -0.2
  - 2018: -0.1
  - 2019: 0.0
  - 2020: -0.1
  - 2021: -0.1
  - 2022: 0.0
  - 2023: -0.1
  - Cumulative (2018–2023): -0.5
- Primary revenue and grants (percent of GDP) (2016–2023): 25.7, 27.3, 27.7, 27.5, 27.3, 27.1, 26.9, 26.6, 26.4 (cumulative 161.8)
- Primary expenditure (percent of GDP) (2016–2023): 27.3, 27.1, 27.6, 27.5, 27.2, 27.0, 26.8, 26.6, 26.2 (cumulative 161.3)
- Automatic debt dynamics contribution (percent of GDP):
  - 2016: 0.7
  - 2017: 0.3
  - 2018: -3.2
  - 2019: -1.7
  - 2020: -1.6
  - 2021: -1.6
  - 2022: -1.8
  - 2023: -1.6
  - Cumulative (2018–2023): -9.5
- Interest rate/growth differential (percent of GDP):
  - 2016: 0.1
  - 2017: 0.5
  - 2018: -1.5
  - 2019: -1.7
  - 2020: -1.6
  - 2021: -1.6
  - 2022: -1.8
  - 2023: -1.6
  - Cumulative (2018–2023): -9.5
- Residual (includes guarantees, asset changes, net privatization proceeds, interest revenues, and exchange rate changes during projection):
  - 2016: -0.4
  - 2017: -1.1
  - 2018: 0.1
  - 2019: -1.1
  - 2020: -0.3
  - 2021: -0.6
  - 2022: -0.7
  - 2023: -0.5
  - Cumulative (2018–2023): -3.6

### External Debt Sustainability Framework — selected table highlights (2013–2023)
- Baseline: External debt (percent of GDP):
  - 2013: 60.5
  - 2014: 56.1
  - 2015: 63.0
  - 2016: 61.9
  - 2017: 63.2
  - 2018: 55.5
  - 2019: 54.6
  - 2020: 52.9
  - 2021: 49.3
  - 2022: 48.7
  - 2023: 45.4
- Change in external debt (percent of GDP):
  - 2013: 8.8
  - 2014: -4.4
  - 2015: 7.0
  - 2016: -1.2
  - 2017: 1.3
  - 2018: -7.6
  - 2019: -0.9
  - 2020: -1.8
  - 2021: -3.6
  - 2022: -0.6
  - 2023: -3.2
- Current account deficit, excluding interest payments (percent of GDP):
  - 2013: 8.9
  - 2014: 9.5
  - 2015: 7.0
  - 2016: 6.0
  - 2017: 6.4
  - 2018: 5.0
  - 2019–2023 (baseline): 5.0, 4.7, 4.6, 4.6, 4.7
- Net non-debt creating capital inflows (negative, percent of GDP):
  - 2013: -9.5
  - 2014: -8.1
  - 2015: -8.0
  - 2016: -8.7
  - 2017: -8.6
  - 2018: -7.7
  - 2019: -6.6
  - 2020: -6.2
  - 2021: -6.5
  - 2022: -6.9
  - 2023: -7.3
- External debt-to-exports ratio (in percent):
  - 2013: 209.1
  - 2014: 198.7
  - 2015: 231.2
  - 2016: 213.9
  - 2017: 200.3
  - 2018: 177.5
  - 2019: 176.5
  - 2020: 168.9
  - 2021: 157.5
  - 2022: 155.8
  - 2023: 144.7
- Gross external financing need (in billions of US dollars) and in percent of GDP are reported for 2013–2023 (table entries include values such as 1.7, 2.2, 2.0, 1.6, 1.8, 2.1, 1.9, 2.3, 2.1, 2.2, 2.3 and percent-of-GDP counterparts).

### Growth at Risk and spillovers — key points
- Growth-at-Risk (GaR) framework quantifies domestic and foreign risks to Albania’s growth.
- GaR results indicate Albania is mostly exposed to macroeconomic developments in its main trading partners and to deterioration in the level and quality of domestic leverage.
- Albania is a small open economy with a flexible exchange rate regime and an open capital account.
- Dependence on remittances is around 10 percent of GDP to finance its large current account deficit.
- Trade is concentrated with few partners (Italy, Greece, Macedonia) and limited product diversification.
- High-degree of euroization and dependence on euro-denominated foreign funding amplifies transmission of shocks and limits the strength of countercyclical policies.
- To reflect multifaceted growth risks, variables are aggregated into five main regressors (partitions) using principal component analysis (PCA); data coverage starts in 2003 at quarterly frequency.

*Source: IMF staff. (Albania: Public Sector Debt Sustainability Analysis and External Debt Sustainability Framework excerpts.)*

### appendix on the Growth at Risk model”, IMF technical note).

### appendix on the Growth at Risk model”, IMF technical note)

### Model specification and partitions
- The Growth-at-Risk model fits Albania’s growth one-year ahead on five PCA-derived regressors and an autoregressive term. For each quantile q in {5%, 10%, 25%, 50%, 75%, 90%, 95%} the model estimates the quantile regression:
  - yt+4 = βy_q yt + βf_q fci_t + βl_q Lev_t + βTP_q TP_t + βEA_q EA_t* + βw_q w_t* + εt+4_q
  - With yt the current annual GDP growth rate, yt+4 the growth rate 4-quarter in the future, fci_t current domestic financial conditions, Lev_t current leverage, TP_t current trade partners macroeconomic conditions, EA_t* current euro area financial conditions, w_t* current world financial conditions, and εt+4_q the quantile-dependent residual.
- Five partitions (PCA factors) used:
  - Domestic Financial Conditions (captures spreads and volatility of local financial instruments; most liquid instruments only; excludes euro-denominated variables except exchange rate volatility).
  - Domestic Leverage (size and quality of balance sheets).
  - Main Trading Partners Macro Conditions (aggregates GDP growth and unemployment in Italy and Greece; channels: trade, remittances, investor confidence).
  - Euro Area Financial Conditions (Italian rate chosen over German Bunds).
  - World Financial Conditions (captures other foreign financial developments not specific to the euro area).

### Variables in each partition (selected)
- Domestic Financial Conditions: One week repo rate; One week repo rate, first difference; Volatility of the repo rate; Deviation from the interest rate corridor; Exchange rate volatility; Volatility of the 2 year sovereign bond; Volatility of the repo rate; Inflation rate, yearly.
- Domestic Leverage: Credit to GDP; Loans to deposits ratio; NPLs to total loans ratio; Tier 1 capital as percent of risk-weighted assets; Share of non-resident liabilities.
- Main Trading Partners Macro Conditions: Italy growth rate; Italy unemployment rate; Greece growth rate; Greece unemployment rate.
- Euro Area Financial Conditions: Euro Area VIX; Euro Area headline inflation, yearly; 10 year Italian sovereign rate; One week Euribor.
- World Financial Conditions: VIX; US Treasuries yield, implied volatility; Oil prices; Oil prices, implied volatility; Bonds flows to Central Europe.

### Key empirical findings (quantile regression results)
- Regressors and dependent variable normalized in standard deviation terms (beta-coefficients).
- Trading partners’ macroeconomic conditions:
  - A 1 standard deviation deterioration in main trading partners today lowers median and 10th percentile GDP growth in Albania by 0.7 standard deviation, one-year ahead.
  - The trading partners coefficient is the same for the median and the 10th percentile (linear effect).
  - In normal times, this coefficient is 6 times larger than the one for euro area financial conditions and 7 times larger than the one for domestic financial conditions.
- Domestic leverage (nonlinear/conditional effect):
  - The coefficient in the 10th percentile quantile regression is 0.48 (i.e., a 1-standard deviation increase in leverage lowers the 10th percentile growth one-year ahead by 0.48 standard deviation), indicating amplified adverse impact in bad times.
- Overall interpretation:
  - Macroeconomic conditions in trading partners exert the largest impact on Albania’s growth one-year ahead in both normal and bad times.
  - High and poor-quality leverage amplifies shocks to growth particularly in bad times.

### Counterfactual shock analysis (2 standard deviation shocks; ceteris paribus)
- Method: shock individual regressors by 2 standard deviations while keeping others constant; report impact on median and 10th percentile growth and probabilities of growth <2%.
- Table of selected shocks (simulated shock; estimated impact on median vs. 10th percentile; no-shock and counterfactual probability of growth <2%):
  - Weaker than expected growth in main trading partners
    - Relative likelihood compared with no-shock scenario: Medium
    - Simulated shock: - 2 stand. dev. in macroeconomic conditions of main trading partners
    - Estimated impact on median vs. 10th percentile (in p.p. real growth): -1.6 p.p.; -1.7 p.p.
    - No-shock and counterfactual probability of growth <2%: 3%; 43%
  - Sharp tightening of financial conditions in the Euro Area
    - Relative likelihood: High
    - Simulated shock: + 2 stand. dev. in EA FCI composite
    - Estimated impact: -0.9 p.p.; -1 p.p.
    - Probability growth <2%: 3%; 20%
  - Financial turmoil in key partner country
    - Relative likelihood: Medium
    - Simulated shock: + 2 stand. dev. in key partners bond rates
    - Estimated impact: -1.1 p.p.; -1.8 p.p.
    - Probability growth <2%: 3%; 25%
  - Increase in leverage
    - Relative likelihood: Low
    - Simulated shock: + 2 stand. dev. in leverage index
    - Estimated impact: -0.4 p.p.; -2 p.p.
    - Probability growth <2%: 3%; 16%
- Magnitude statement:
  - The magnitude of the worst shocks could cost on average 1.8–2 p.p. GDP growth to Albania should they materialize.

### Model notes and methodological references
- The quantile regressions form a non-linear mapping between regressors at time t and distribution of future growth at t+4.
- Parametric derivation of the density uses a Tskew distribution (as explained in referenced methodology).
- The model provides conditional density forecasts and allows comparative static counterfactuals (e.g., impact on probability growth <2%).
- Caveat: reduced-form model is fitted on past data, without structural identification; it encompasses an “average” policy reaction function but does not capture responses beyond past practice.

### Arrears—summary of drivers and recent evolution (Annex V)
- Stock and chronology:
  - New central government arrears uncovered in 2013 totaled 4.8 percent of GDP.
  - Authorities’ first stocktaking of local government arrears in 2015 revealed an end-2015 stock of around 0.8 percent of GDP (mostly legacy arrears).
  - Under a 2014 arrears clearance strategy, the stock of central government arrears was reduced to 0.2 percent of GDP in 2015.
  - New government arrears emerged in 2017; the stock is estimated at 1.5 percent of GDP at end-September 2018.
- Composition shift:
  - About 60 percent of central government arrears at end-2014 accumulated in infrastructure and energy; close to 70 percent of local government arrears in 2015 were related to investment projects.
  - In 2017, VAT refund arrears represented 67 percent of central government past due financial obligations (compared with 17 percent in 2014).
  - Around 70 percent of total VAT arrears are related to three large taxpayers involved in big investment projects.
- Root causes and public financial management weaknesses:
  - Revenue forecasting: on average in last 10 years, tax revenues underperformed relative to plan by close to 1.5 percent of GDP; VAT revenue projections are overly optimistic and do not fully account for VAT refunds.
  - Cash forecasting and management: treasury plans stipulate monthly expenditure limits and targets rather than proper cash forecasts, hindering realistic planning of future inflows and outflows.
  - Weaknesses in commitment control for public investment projects: multiyear contracts entered with inadequate provision in outer years of medium-term budget; multiyear commitment control not fully rolled out for Albanian Road Authority (ARA), the main contributor to expenditure arrears.
  - Lack of transparency and commitment to address the above problems.

*Source: IMF staff technical note — appendix on the Growth at Risk model (Albania).*

### 4.      Prevention and control of budgetary arrears requires tangible steps:

### 4.      Prevention and control of budgetary arrears requires tangible steps:

### Key measures recommended
- Ensuring realistic revenue projections.
- Improving the effectiveness of cash management to ensure that cash is available to meet government’s payment obligations. This would imply improving cash forecasting for both revenue and expenditure. Improving coordination between cash and debt management is also needed.
- Paying legitimate tax refunds promptly is important in creating trust in the tax administration and the functioning of the VAT system. It is imperative to recognize that refunds are an integral part of the operation of the VAT system, and not an extraordinary item.
- Further improving transparency in procurement and introducing binding annual and multi-year commitment limits, including in the ARA.
- Strengthening financial oversight of the fiscal risks at central and local government levels. Improve transparency and ensure that stock of arrears is published on a regular basis.

*Source: ALBANIA — STAFF REPORT FOR THE 2018 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX*

### 2015. A partial buyback of the 2015 Eurobond has improved the debt profile. The authorities’

### cr1929-albania-a4 - 2015. A partial buyback of the 2015 Eurobond has improved the debt profile. The authorities’

### Fiscal policy, debt strategy, and budget 2019
- Debt strategy aims at diversifying the investors’ base, limiting foreign-denominated borrowing, and further extending the average maturity.
- The 2019 budget targets a deficit of 1.9 percent of GDP, described as the lowest targeted level in the last two decades.
- Budget measures to achieve the deficit target:
  - new tax measures,
  - further improvements in tax-administration,
  - contained total expenditures,
  - accommodating a relatively high level of capital expenditures.
- Quality-of-spending actions:
  - Risk-based approach to tax controls is raising collection from the buoyant tourism sector.
  - E-invoicing and a new system for data integration to enhance tax compliance.
  - Authorities intend to prepare a medium-term revenue strategy with technical assistance from the Fund.
- Capital and social spending priorities:
  - Capital spending kept at 5 percent of GDP, implying a significant increase in real terms to narrow the infrastructure gap and facilitate interconnectivity.
  - Budget allocates more resources to education as requested by the students.
- Public-private partnerships (PPP) and public investment management:
  - Payments for PPP-related projects will be maintained well below the limit of 5 percent of tax revenues.
  - Parliament is examining a new law reforming all aspects of PPP governance.
  - A recently launched centralized database enables the Ministry of Finance to improve decision-making and public investment management steps.
- Government arrears and cash-flow management:
  - Central government has started to clear arrears on projects and is committed to avoid new arrear accumulation.
  - The largest chunk of arrears reflects delayed VAT refunds to three large energy projects.
  - The tax administration announced that these refunds will be paid by the first quarter of 2020.
  - The already operational reverse-charge mechanism will help to prevent their reoccurrence.
  - Ongoing review of the PFM, aligned with PEFA recommendations, should help address arrears; capacity constraints remain a challenge.
  - The 2019 budget introduced, for the first time, a statement on the extent of possible fiscal risks.

### Monetary policy and financial stability
- Monetary policy stance:
  - Authorities intend to maintain an accommodative monetary policy stance, in line with staff advice.
  - The BoA lowered the policy rate to 1 percent in June 2018, through a 25 basis points cut.
  - Central bank guidance aims to signal a data-dependent normalization path, ready to respond to shocks flexibly.
- Credit and transmission:
  - Low interest rates are supporting credit expansion.
  - Net of exchange rate effects and loans write-off, private credit grew by 4.9 percent in the third quarter.
  - The level of credit in the economy remains below its potential.
  - Impediments to transmission include high financial and real sector euroization and low risk appetite among commercial banks, especially EU ones.
  - New higher reserve requirements for foreign currency deposits and strict transparency requirements on unhedged foreign currency lending are expected to strengthen transmission.
- Banking sector soundness and supervision:
  - Overall financial system remains sound, but ongoing changes require careful monitoring.
  - NPLs decreased to 12.7 percent of total loans in November 2018, down from a peak level of close to 25 percent in 2014.
  - NPL ratios below 10 percent are already recorded in most of the banks.
  - BoA has monitored restructuring and consolidation and devoted large resources to supervision.
  - Harmonization with international practices progressed, including establishment of a fund for bank resolution.
  - BoA signed two Memoranda of Cooperation on banking supervision and resolution with the European Central Bank and the Single Resolution Board.
- AML/CFT and compliance:
  - As regards AML/CFT deficiencies identified by Moneyval, relevant stakeholders are implementing an action plan following recommended priority actions; implementation of the EU framework is ongoing.

### Structural reforms, governance, and inclusion
- EU accession as focal point:
  - Expected opening of EU membership negotiations provides momentum for continued structural reforms.
  - Ongoing efforts to address governance weaknesses aim to pave the way for opening negotiations.
- Judicial and anti-corruption reforms:
  - Comprehensive judicial system reform is in full swing with more than 100 judges already vetted.
  - New institutions guaranteeing independent self-governing of the judiciary have been established.
  - A special structure has been established to investigate and fight organized crime and acts of corruption.
- Energy sector reform and recovery:
  - Significant strides made in reforming and modernizing the energy sector, a government top priority.
  - A five-year financial recovery plan prepared with the World Bank envisions clearance of inter-enterprise arrears, further reduction of distribution losses, and better targeting of investments.
  - Authorities are working on measures to diversify energy sources toward gas and renewable resources.
- Social and healthcare reforms:
  - Government intends to reform health care and social programs to better target beneficiaries and balance social and financial sustainability.
- Business environment progress:
  - Albania moved in the Doing Business ranking from position no. 120 in 2007 to no. 63 in 2018, narrowing the gap with the average of the region.

*Source: https://www.imf.org/-/media/files/publications/cr/2019/cr1929-albania-a4.pdf*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/cr1929-albania-a4.pdf_