## 1albea2020002

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### Executive summary — context, shocks, and near-term outlook
- Context and shocks
  - Albania was hit by the November 2019 earthquake and the COVID-19 pandemic; macroeconomic and financial stability have so far been maintained.
  - Pre-shocks performance: growth averaged 3.7 percent during 2016-18; public debt came down to 67.8 percent of GDP in 2019.
  - Structural weaknesses: economic governance and institutional weaknesses, including the need for electoral, judicial, and rule of law reforms; reform momentum slowed ahead of general elections slated for April 2021.
- Recent developments and near-term outlook
  - GDP and activity:
    - Economic contraction began in 2019Q4 and reached 10.2 percent (y-o-y) in 2020Q2.
    - Staff baseline: economy expected to contract by -7½ percent in 2020 and rebound gradually in 2021-22 as shocks subside and reconstruction spending picks up.
  - Prices and inflation:
    - Inflation picked up in March reflecting a spike in food prices but declined to 1.5 percent in September.
    - BOA projects inflation to return to the 3 percent target in 2022 (authorities’ view).
  - External sector:
    - Current account deficit projected to widen to 10.6 percent of GDP in 2020.
    - International reserves likely to increase slightly, reaching €3.5 billion or 165 percent of ARA metric at end-2020.
    - Eurobond issuance of €650 million during 2020 helped reserve position; BOA established a repo line of €400 million with the ECB.
  - Fiscal sector and revenues:
    - Tax revenue during January-September is down by 10.6 percent (y-o-y); profit and income taxes declined 29 percent (y-o-y).
    - Travel arrivals dropped by 57 percent (y-o-y) during January-September, pressuring tourism receipts and VAT revenues.
    - Total expenditures are up by 5.5 percent (y-o-y) but are under-executed versus the budget; earthquake reconstruction spending as of September reached about 8 percent of the budgeted annual amount.
  - Policy response:
    - Authorities imposed strict lockdown in March and relaxed in June; tightened restrictions again with rising cases in fall.
    - Three budget revisions: first two increased health spending and support to businesses/households; third scaled up reconstruction and investment.
    - BOA relaxed policy stance, increased liquidity provision, and introduced relief measures for banks and borrowers.
  - Pandemic dynamics:
    - New COVID-19 cases rose after lifting restrictions in June and accelerated since October.
    - Downside risks rising with second waves in Europe; a more severe pandemic would further weaken tourism, remittances, external demand, and FDI, and tighten financial conditions.

### Capacity to repay the Fund and debt vulnerabilities
- RFI and Fund exposure
  - Following the RFI, Fund credit outstanding is estimated at 279.2 percent of quota at end-2020, equivalent to 3.6 percent of GDP or 13.2 percent of gross international reserves.
  - Debt service to the Fund projected to peak in 2024 at 0.9 percent of GDP and 3.3 percent of reserves.
- Public debt and financing needs
  - Public debt projected to rise to 81.9 percent of GDP in 2020 and decline to just below 70 percent in 2025.
  - Effective interest rate around 3 percent, far below nominal GDP growth during 2021-25.
  - Gross financing needs (GFNs) expected to rise to 24.1 percent of GDP in 2020 and average 20.4 percent of GDP in the medium-term.
  - Key vulnerabilities: rollover risk due to short maturity of domestic debt (half of total), exchange rate risk from increased reliance on FX commercial debt, euroization of deposits, and unhedged FX borrowing.
- Banking sector and external position
  - Improved asset quality and capital buffers bolster banks’ loss-absorption capacity; systemic banks’ foreign ownership is a mitigating factor.
  - Net international investment position was -52 percent of GDP in 2019; foreign liabilities amounted to 110 percent of GDP, with over half being FDI and a quarter long-term public debt.
- Overall assessment
  - Albania’s capacity to repay is assessed as adequate under the baseline; repayment risks have risen but remain contained and manageable, aided by reserve coverage, market access (Eurobond), access to development partner financing, and the ECB repo line.
  - If the pandemic is more severe, financing needs would rise and additional official support, including from the Fund, could be needed.

### Major risks and overarching policy recommendations
- Overarching approach
  - Manage risks amid large uncertainty through continued support for the economy, gradually rebuilding policy room as recovery becomes entrenched, and close financial sector supervision.
  - Support should be temporary, targeted, and subject to transparency and accountability.
  - Prepare contingency measures in case of a more severe pandemic.
- Fiscal recommendations
  - With projected recovery in 2021, authorities should aim for larger deficit reduction than consistent with their budget and, given downside risks, maintain a sizeable liquidity buffer for contingencies.
  - Contain non-priority spending to make room for health care provision and social protection; improve spending efficiency.
  - Strengthen public investment management urgently and contain and manage increasing fiscal risks.
  - Prepare and implement a Medium-Term Revenue Strategy (MTRS) in 2021; avoid frequent ad hoc tax changes.
  - As shock effects subside, take modest revenue measures in 2021 and build on them substantially over time.
- Financial sector recommendations
  - Intensify supervision and monitoring of bank balance sheets and NPL developments; guide and permit prudent restructurings.
  - Retain restriction on dividend distributions through end-2020 until capital positions are assessed; allow temporary capital shortfalls only with credible restoration plans.
  - Improve NPL resolution framework: operationalize insolvency and resolution frameworks, implement out-of-court restructuring regulation, progress bailiff reform, and improve judicial recovery processes.
- Contingency planning
  - Prepare targeted measures to ensure adequate health care provision, protect the most vulnerable, identify budget reallocation options and additional official financing, and keep domestic financial market liquid.

### Fiscal stance, medium-term targets, and scenarios
- Staff recommended a budget deficit of about 5.2 percent of GDP in 2021 or 1.6 percent of GDP lower than the deficit of 2020 reflecting mostly cyclical improvement.
- Capital expenditure related to the earthquake should be accommodated, but staff sees limited scope for additional large increases in capital expenditure without compromising quality.
- Medium-term targets and reform path
  - Staff recommended reaching a primary surplus of 1½ percent of GDP by 2023, building on revenue gains from the MTRS.
  - The recent amendment to the fiscal rules stipulating a primary balance of at least zero from 2023 onward should be seen as a floor rather than a target.
  - Under the reform path, public debt is projected to decline to below 65 percent of GDP in 2025.
- Key projection rows (values preserved exactly as in source)
  - Tax revenues (IMF baseline): 25.7, 25.6, 25.4, 23.2, 24.7, 25.2, 25.4, 25.3, 25.2
  - Tax revenues (IMF reform path): 23.2, 24.9, 26.4, 27.0, 27.3, 27.5
  - Capital expenditures (incl. reconstruction) (IMF baseline): 4.4, 4.8, 4.5, 5.8, 6.8, 4.8, 4.3, 4.3, 4.3
  - Capital expenditures (IMF reform path): 5.8, 6.1, 4.8, 4.4, 5.0, 5.6
  - Overall balance (IMF baseline): -2.0, -1.3, -2.0, -6.8, -6.1, -3.0, -2.0, -2.0, -1.9
  - Overall balance (IMF reform path): -6.8, -5.2, -1.8, -0.4, -0.6, -0.8
  - Primary balance (IMF baseline): 0.1, 0.9, 0.1, -4.7, -4.0, -0.9, 0.0, 0.0, 0.0
  - Primary balance (IMF reform path): -4.7, -3.1, 0.3, 1.5, 1.3, 1.0
  - Public debt (IMF baseline): 71.9, 69.5, 67.8, 81.9, 81.5, 79.6, 75.3, 73.5, 69.1
  - Public debt (IMF reform path): 81.9, 81.0, 78.3, 71.8, 68.8, 63.5
  - Real GDP growth, baseline (percent): -7.5, 5.4, 5.0, 4.4, 3.5, 3.4
  - Real GDP growth, reform path (percent): -7.5, 5.0, 4.7, 4.3, 4.2, 4.3

### Public financial management, procurement, and fiscal risks
- Fiscal support should be temporary and targeted, subject to transparency, accountability, and adequate PFM controls.
- Urgent need to strengthen public investment management:
  - Projects should come from a pipeline that has undergone rigorous preparation, assessment, and prioritization.
  - Establish a unified process for preparing, prioritizing, and evaluating all public investment projects, including PPPs; prevent use of unsolicited PPPs.
- Fiscal risks requiring monitoring and management:
  - PPPs: contract value of PPPs is expected to increase to almost 50 percent of GDP in 2021, with payments from the budget doubling to 3.7 percent of tax revenue; rigorous assessment and management of contingent liabilities needed.
  - Government guarantees: expected costs related to calls on guarantees should be explicitly incorporated into the budget and transparently reported.
  - SOEs: continue efforts to improve performance of the state-owned electricity sector and other SOEs; staff concerned about Albania Investment Corporation (AIC) bringing new fiscal risks.
- Arrears, cash, and debt management:
  - Avoid creating new arrears and stick to the plan to clear the existing stock.
  - Permanent solution to VAT arrears requires realistic revenue forecasts, disentangling VAT repayments from collection, and stronger cash management.
  - Continue lengthening the maturity of public debt.

### Financial sector developments, risks, and regulatory responses
- Banking sector indicators and immediate priorities
  - Credit growth reached 6.3 percent (y-o-y) in September.
  - NPLs at 8.3 percent of total loans in September remain high compared to regional peers.
  - Average capital adequacy ratio was 18.6 percent in September, above regulatory requirements (12 percent plus add-on for some banks).
  - Net profit of the banking system declined considerably in 2020.
- Near-term supervisory priorities
  - Closely monitor and guide banks’ restructuring of credit portfolios; support prudent restructurings where necessary.
  - BOA should guide and monitor quality of restructurings and maintain loan classification and provisioning rules.
  - Retain restriction on dividend distributions through end-2020 until full impact is known.
- Preparations for NPL surge and resolution framework improvements:
  - Operationalize and enforce insolvency and resolution framework.
  - Implement regulatory framework for out-of-court loan restructuring.
  - Progress bailiff reform and improve judicial loan recovery processes.
- Recent regulatory developments (high level)
  - Bank capital, liquidity, supervision, and macro‑prudential standards updated or planned (Tier 1 increases, Basel III LCR, NSFR planned, countercyclical and conservation buffers, D-SIB framework).
  - Amendments to AML/CFT regulations and moves to establish beneficiary owner register.

### Contingency planning and monetary policy stance
- Contingency planning
  - In case of a more severe pandemic, authorities should:
    - target new measures to ensure adequate health care provision and protect the most vulnerable;
    - identify options for budget reallocations and additional official financing;
    - keep the domestic financial market liquid.
- Monetary policy and FX
  - Staff supports accommodative monetary policy stance and flexible exchange rate policy.
  - BOA cut policy rate to 0.5 percent on March 25th and moved to fixed-price full-allotment liquidity operations.
  - BOA suspended banks’ dividend payments through end-2020 and introduced moratoriums and regulatory forbearance measures (opt-in moratorium covered almost 40% of loan portfolio).
  - FX interventions included selling €20.4m in end-March to smooth volatility.
  - BOA should weigh costs/benefits of unconventional instruments; unconventional measures considered a last resort.

### Key statistics and selected projections
- GDP contraction: 10.2 percent (y-o-y) in 2020Q2; staff baseline: -7½ percent in 2020.
- Inflation: 1.5 percent in September 2020; target 3 percent over the medium term.
- Current account deficit: projected 10.6 percent of GDP in 2020.
- International reserves: projected €3.5 billion or 165 percent of ARA metric at end-2020.
- Fund credit outstanding after RFI: 279.2 percent of quota at end-2020 = 3.6 percent of GDP = 13.2 percent of gross international reserves.
- Debt projections: public debt 81.9 percent of GDP in 2020; just below 70 percent in 2025.
- Gross financing needs: 24.1 percent of GDP in 2020; average 20.4 percent in the medium term.
- Tax revenue January-September: down 10.6 percent (y-o-y); profit and income taxes down 29 percent (y-o-y).
- Travel arrivals January-September: down 57 percent (y-o-y).
- Fiscal balance: deficit rose from 2 percent of GDP in 2019 to estimated 6.8 percent in 2020 (staff); 2021 budget deficit envisages 6.5 percent of GDP (authorities); staff baseline projects 6.1 percent of GDP in 2021 under adjusted assumptions.
- Selected macro framework figures (selected years preserved exactly):
  - Real GDP growth (percent change): 3.3 (2016), 3.8 (2017), 4.1 (2018), 2.2 (2019), -7.5 (2020), -5.0 (2021 RFI), 5.4 (2021 Budget), 8.0 (2022), 5.0 (2023), 4.4 (2024), 3.5 (2025).
  - Consumer Price Index (eop): 2.2 (2016), 1.8 (2017), 1.8 (2018), 1.1 (2019), 1.0 (2020), projections include 2.9 (2022) and 3.0 (2025).
  - Current Account Balance (Percent of GDP): -7.6 (2016), -7.5 (2017), -6.8 (2018), -8.0 (2019), -10.6 (2020), RFI 2021: -11.2, RFI 2021 (alt): -8.3, 2022: -8.1, 2023: -7.9, 2024: -7.8, 2025: -7.7.

### Annex I — Policy responses to earthquake and COVID-19 (selected measures and financing)
- Overview of support:
  - Support packages for COVID-19 in first two budget revisions totaled 2.9 percent of the GDD (1.2 percent of GDP on the budget and 1.7 percent off the budget).
  - Earthquake reconstruction ramped up in third budget revision to 2.2 percent of GDP (Lek34 billion).
- Earthquake reconstruction fund:
  - Earthquake magnitude 6.4 in November 2019 caused 51 victims and damages of 7 percent of GDP.
  - Initial 2020 budget allocation: Lek20 billion (1.2 percent of GDP), financed by Lek7 billion in grants and the rest from the budget; third review increased overall spending to Lek34 billion (2.2 percent of GDP) with grants received so far lower (Lek3 billion).
- COVID-19 fiscal measures (on- and off-budget):
  - On-budget measures: Lek19 billion or 1.2 percent of GDP (health spending Lek2.5 billion; wage and social support Lek6.5 billion; one-off transfers and other items).
  - Off-budget measures: Lek26 billion—1.7 percent of GDP (sovereign guarantee fund Lek11 billion; recovery fund guarantee scheme Lek15 billion).
- Monetary and financial measures:
  - BOA cut policy rate to 0.5 percent; overnight lending facility rate reduced to 0.9 percent.
  - Open market operations switched to unlimited amounts at fixed price.
  - Loan moratorium enabled borrowers to defer installments without penalties; almost 40% of loan portfolio opted in.
  - BOA suspended banks’ dividend payments through end-2020 and amended capital adequacy regulation lowering risk weight of euro-denominated securities issued in 2020 from 50 percent to zero.

### Debt service, public sector DSA, and stress-test outcomes
- Debt service and financing needs
  - Total public and private external debt service expected to increase to 18 percent of GDP in 2020 and fall to 14 percent by 2024 before increasing to 17 percent in 2025.
  - Commercial debt as a percentage of total public sector debt expected to increase from 13 percent at end-2019 to 19 percent by end-2020, 25 percent in 2022, and 34 percent in 2025.
  - Public gross financing needs (selected): 2020: 21.6; 2021: 20.7; 2022: 24.1; 2023: 20.1; 2024: 20.2; 2025: 22.0 (percent of GDP).
- Stress tests
  - Under a 30 percent exchange rate depreciation shock, external debt would peak at 106 percent of GDP in 2021 before declining to 89 percent by 2025.
  - Following a current account shock of half a standard deviation (around 1 percent of GDP), external debt would peak at 73 percent of GDP in 2021 and decline to 64 percent by 2025.
- Public DSA baseline contributors and key macro assumptions (selected)
  - Nominal gross public debt (percent of GDP) sample: 2018: 66.7; 2019: 69.5; 2020: 67.8; 2021: 81.9; 2022: 81.5; 2025: 73.5.
  - Key macro assumptions (baseline): Real GDP growth 2020: -7.5; 2021: 5.4; 2022: 5.0. Effective interest rate (percent): 2020: 3.1; 2021: 2.6; 2025: 3.3. Primary balance (percent of GDP): 2020: -4.7; 2021: -4.0; 2022: -0.9; 2023–2025: 0.0.

### Financing, treasury, and institutional actions
- The 2020 budgetary deficit (8.4 percent of GDP) is fully financed.
- Authorities expect to keep domestic financing comfortably below 3 percent of GDP over the next 5 years.
- Treasury Single Account (TSA) balances were slightly above the envisaged 1 percent of GDP upper bound; expected to be within the recommended range going forward.
- VAT arrears and tax administration:
  - Stock of VAT arrears to small taxpayers almost totally repaid, except ALL 79 million.
  - Remaining stock of ALL 12 billion due to three large taxpayers; expected to be cleared by mid-2021.
  - Tax amnesty law is under parliamentary review; authorities will not pass it until concerns are addressed.
- Energy sector and insurance:
  - Electricity generation negatively affected by drought in 2019 and twin shocks in 2020; household tariffs among the lowest in Europe.
  - Insurance market no liquidity issues; only 2.5 percent of impacted building was insured.

*Source: IMF staff report section titled "14.      Fiscal policy should balance supporting the economy and addressing Albania’s" (selected chapter content).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context and shocks
- Albania was hit by the November 2019 earthquake and the COVID-19 pandemic; macroeconomic and financial stability have so far been maintained.
- Pre-shocks performance: growth averaged 3.7 percent during 2016-18; public debt came down to 67.8 percent of GDP in 2019.
- Structural weaknesses: economic governance and institutional weaknesses, including the need for electoral, judicial, and rule of law reforms; reform momentum slowed ahead of general elections slated for April 2021.

### Recent developments and near-term outlook
- GDP and activity
  - Economic contraction began in 2019Q4 and reached 10.2 percent (y-o-y) in 2020Q2.
  - Staff baseline: economy expected to contract by 7½ percent in 2020 and rebound gradually in 2021-22 as shocks subside and reconstruction spending picks up.
- Prices and inflation
  - Inflation picked up in March reflecting a spike in food prices but declined to 1.5 percent in September.
  - BOA projects inflation to return to the 3 percent target in 2022 (authorities’ view).
- External sector
  - Current account deficit projected to widen to 10.6 percent of GDP in 2020.
  - International reserves likely to increase slightly, reaching €3.5 billion or 165 percent of ARA metric at end-2020.
  - Eurobond issuance of €650 million during 2020 helped reserve position; BOA established a repo line of €400 million with the ECB.
- Fiscal sector and revenues
  - Tax revenue during January-September is down by 10.6 percent (y-o-y); profit and income taxes declined 29 percent (y-o-y).
  - Travel arrivals dropped by 57 percent (y-o-y) during January-September, pressuring tourism receipts and VAT revenues.
  - Total expenditures are up by 5.5 percent (y-o-y) but are under-executed versus the budget; earthquake reconstruction spending as of September reached about 8 percent of the budgeted annual amount.
- Policy response
  - Authorities imposed strict lockdown in March and relaxed in June; tightened restrictions again with rising cases in fall.
  - Three budget revisions: first two increased health spending and support to businesses/households; third scaled up reconstruction and investment.
  - BOA relaxed policy stance, increased liquidity provision, and introduced relief measures for banks and borrowers.
- Pandemic dynamics
  - New COVID-19 cases rose after lifting restrictions in June and accelerated since October (Box 1).
  - Downside risks rising with second waves in Europe; a more severe pandemic would further weaken tourism, remittances, external demand, and FDI, and tighten financial conditions.

### Capacity to repay the Fund
- RFI and Fund exposure
  - Following the RFI, Fund credit outstanding is estimated at 279.2 percent of quota at end-2020, equivalent to 3.6 percent of GDP or 13.2 percent of gross international reserves.
  - Debt service to the Fund projected to peak in 2024 at 0.9 percent of GDP and 3.3 percent of reserves.
- Public debt and financing needs
  - Public debt projected to rise to 81.9 percent of GDP in 2020 and decline to just below 70 percent in 2025.
  - Effective interest rate around 3 percent, far below nominal GDP growth during 2021-25.
  - Gross financing needs (GFNs) expected to rise to 24.1 percent of GDP in 2020 and average 20.4 percent of GDP in the medium-term.
  - Key vulnerabilities: rollover risk due to short maturity of domestic debt (half of total), exchange rate risk from increased reliance on FX commercial debt, euroization of deposits, and unhedged FX borrowing.
- Banking sector
  - Improved asset quality and capital buffers bolster banks’ loss-absorption capacity; systemic banks’ foreign ownership is a mitigating factor.
  - Risks remain that full impact of shocks on banks’ balance sheets may materialize with a lag; close monitoring required.
- External position
  - Net international investment position was -52 percent of GDP in 2019; foreign liabilities amounted to 110 percent of GDP, with over half being FDI and a quarter long-term public debt.
  - Reserve coverage and flexible exchange rate are important shock absorbers; fiscal consolidation would reduce external vulnerabilities and financial sector risks.
- Overall assessment
  - Albania’s capacity to repay is assessed as adequate under the baseline; repayment risks have risen but remain contained and manageable, aided by reserve coverage, market access (Eurobond), access to development partner financing, and the ECB repo line.
  - If the pandemic is more severe, financing needs would rise and additional official support, including from the Fund, could be needed.

### Major risks and policy recommendations
- Overarching policy approach
  - Manage risks amid large uncertainty through continued support for the economy, gradually rebuilding policy room as recovery becomes entrenched, and close financial sector supervision.
  - Support should be temporary, targeted, and subject to transparency and accountability.
  - Prepare contingency measures in case of a more severe pandemic.
- Fiscal policy
  - With projected recovery in 2021, authorities should aim for larger deficit reduction than consistent with their budget and, given downside risks, maintain a sizeable liquidity buffer for contingencies.
  - Make room to protect essential activities and vulnerable groups by containing non-priority spending and improving spending efficiency.
  - Urgent need to strengthen public investment management and contain and manage increasing fiscal risks.
  - Preparation of a Medium-Term Revenue Strategy (MTRS) should proceed without delays to comprehensively review and redesign the tax system; avoid frequent and ad hoc tax changes.
  - As shock effects subside, take modest revenue measures in 2021 and build on them substantially over time to recreate room for fiscal maneuver.
- Financial sector
  - Strong efforts warranted to safeguard financial stability while supporting borrowers hit by the shocks; intensify supervision and monitoring of bank balance sheets and NPL developments.
- Contingency planning
  - Authorities should prepare contingency measures in case of a more severe pandemic, given rising infections and downside risks.

### Key statistics and projections (selected)
- GDP contraction: 10.2 percent (y-o-y) in 2020Q2; staff baseline: -7½ percent in 2020.
- Inflation: 1.5 percent in September 2020; target 3 percent over the medium term.
- Current account deficit: projected 10.6 percent of GDP in 2020.
- International reserves: projected €3.5 billion or 165 percent of ARA metric at end-2020.
- Fund credit outstanding after RFI: 279.2 percent of quota at end-2020 = 3.6 percent of GDP = 13.2 percent of gross international reserves.
- Debt projections: public debt 81.9 percent of GDP in 2020; just below 70 percent in 2025.
- Gross financing needs: 24.1 percent of GDP in 2020; average 20.4 percent in the medium term.
- Tax revenue January-September: down 10.6 percent (y-o-y); profit and income taxes down 29 percent (y-o-y).
- Travel arrivals January-September: down 57 percent (y-o-y).
- Fiscal balance: deficit rose from 2 percent of GDP in 2019 to estimated 6.8 percent in 2020 (staff); 2021 budget deficit envisages 6.5 percent of GDP (authorities); staff baseline projects 6.1 percent of GDP in 2021 under adjusted assumptions.

*IMF Executive Summary — Albania, November 6, 2020.*

### 14.      Fiscal policy should balance supporting the economy and addressing Albania’s

### 14.      Fiscal policy should balance supporting the economy and addressing Albania’s

### Fiscal stance and 2021 recommendations
- Staff recommended a budget deficit of about 5.2 percent of GDP in 2021 or 1.6 percent of GDP lower than the deficit of 2020 reflecting mostly cyclical improvement.
- Capital expenditure related to the earthquake should be accommodated.
- Staff does not see scope for additional large increases in capital expenditure (on top of earthquake reconstruction) without compromising the quality of spending due to weaknesses in public investment management and financing constraints.
- The authorities should:
  - contain non-priority spending to make room for adequate health care provision and social protection for the most vulnerable;
  - maintain a sizable liquidity buffer for contingencies, as the risks to activity are to the downside and rising.
- Staff assumes a small revenue gain (0.2 percent of GDP) from starting to implement a sound MTRS in 2021 (¶16).
- Fiscal upsides need to be saved or used to reduce debt.
- Automatic stabilizers should be allowed to operate if downside risks materialize and provided financing is available.

### Medium-term fiscal targets and scenarios
- Staff recommended reaching a primary surplus of 1½ percent of GDP by 2023, building on the revenue gains from the MTRS.
- The recent amendment to the fiscal rules stipulating a primary balance of at least zero from 2023 onward should be seen as a floor rather than a target.
- A lower primary surplus of 1 percent of GDP could be considered for 2025, provided that:
  - management of public investment and fiscal risks is strengthened by then; and
  - the additional room is used to address Albania’s large infrastructure and human development needs rather than to accommodate lower revenue.
- Under the reform path, growth is projected to be lower than under the baseline during 2021-23 reflecting larger deficit reduction, but medium-term prospects improve as tax system reforms and increased spending on infrastructure and human development take effect.
- Public debt is projected to decline to below 65 percent of GDP in 2025 under the reform path.

### Key projection figures (select rows from staff projections)
- Tax revenues (IMF baseline): 25.7, 25.6, 25.4, 23.2, 24.7, 25.2, 25.4, 25.3, 25.2
- Tax revenues (IMF reform path): 23.2, 24.9, 26.4, 27.0, 27.3, 27.5
- Capital expenditures (incl. reconstruction) (IMF baseline): 4.4, 4.8, 4.5, 5.8, 6.8, 4.8, 4.3, 4.3, 4.3
- Capital expenditures (IMF reform path): 5.8, 6.1, 4.8, 4.4, 5.0, 5.6
- Overall balance (IMF baseline): -2.0, -1.3, -2.0, -6.8, -6.1, -3.0, -2.0, -2.0, -1.9
- Overall balance (IMF reform path): -6.8, -5.2, -1.8, -0.4, -0.6, -0.8
- Primary balance (IMF baseline): 0.1, 0.9, 0.1, -4.7, -4.0, -0.9, 0.0, 0.0, 0.0
- Primary balance (IMF reform path): -4.7, -3.1, 0.3, 1.5, 1.3, 1.0
- Public debt (IMF baseline): 71.9, 69.5, 67.8, 81.9, 81.5, 79.6, 75.3, 73.5, 69.1
- Public debt (IMF reform path): 81.9, 81.0, 78.3, 71.8, 68.8, 63.5
- Memorandum: Revenue gains under reform path: 0.2, 1.0, 0.4, 0.4, 0.3
- Memorandum: Capital expenditure increases under reform path: -0.7, 0.0, 0.1, 0.6, 0.6
- Real GDP growth, baseline (percent): -7.5, 5.4, 5.0, 4.4, 3.5, 3.4
- Real GDP growth, reform path (percent): -7.5, 5.0, 4.7, 4.3, 4.2, 4.3
(Note: these rows preserve each numeric value exactly as presented in the source table.)

### Public financial management, procurement, and public investment
- Fiscal support should be temporary and targeted, subject to transparency, accountability, and adequate PFM controls.
- Permanent profit tax removal for businesses with annual turnovers up to Lek14 million undermines tax compliance given the high threshold; several other ad hoc tax exemptions would weaken the tax base.
- PFM short-cuts necessary during the emergency should be regularized as soon as possible and earthquake reconstruction funds should be subject to adequate PFM controls, including planning through the budget process.
- Ensure proper procurement, strong oversight, adequate monitoring and timely reporting (including publication of beneficial owners of procurement contracts), and independent ex-post audits.
- Urgent need to strengthen public investment management:
  - Projects should come from a pipeline that has gone through rigorous preparation, assessment, and prioritization and will contribute to an inclusive recovery.
  - Establish a unified process for preparing, prioritizing, and evaluating all public investment projects, including PPPs.
  - Prevent use of unsolicited PPPs.

### Tax policy reform: MTRS
- Complete, adopt, and start implementing a sound MTRS in 2021, following public consultation.
- Rationale: Greater tax revenue is essential to support investment in physical and human capital while reducing public debt.
- Albania’s tax system is complex and fragmented; frequent ad hoc changes have undermined stability and transparency.
- A fairer, simpler, more efficient, and more transparent tax system can boost revenue while improving the investment climate and reducing informality.
- The ongoing preparation of a MTRS offers a welcome opportunity and should proceed without further delays.

### Fiscal risks requiring monitoring and management
- PPPs:
  - Contract value of PPPs is expected to increase to almost 50 percent of GDP in 2021, with payments from the budget doubling to 3.7 percent of tax revenue.
  - Need rigorous assessment and management of direct budgetary impact and contingent liabilities; impacts should be captured in fiscal accounts in line with best practices.
  - PPP law strengthened the MOFE gatekeeping role; MOFE needs capacity to perform this task.
- Government guarantees:
  - Some safeguards were built into two recent schemes; MOFE needs to closely monitor schemes.
  - Expected costs related to calls on guarantees should be explicitly incorporated into the budget and detailed information transparently reported.
- SOEs:
  - Continue efforts to improve performance of the state-owned electricity sector and other SOEs and address shock-related impacts on their finances.
  - Staff remains concerned that the Albania Investment Corporation (AIC), once operational, will bring new fiscal risks.

### Arrears, cash, and debt management
- Authorities should avoid creating new arrears and stick to the plan to clear the existing stock.
- Permanent solution to VAT arrears requires realistic revenue forecasts, disentangling VAT repayments from collection, and strengthening budgetary controls and cash management.
- Discontinue practice of using past years’ refunds as a guide for future VAT refunds; set VAT collection targets on a net basis.
- Continue to strengthen cash and debt management by:
  - consolidating cash and government banking arrangements;
  - improving cash forecasting;
  - strengthening cash management instruments;
  - improving coordination in cash management.
- Authorities should continue lengthening the maturity of public debt.

### AML/CFT and governance
- Important to continue to effectively address shortcomings identified by FATF and MONEYVAL without delay, including establishing a beneficial ownership register.
- Take measures to mitigate any new or emerging ML/TF risks arising from the shocks.
- Staff advised against a proposed tax amnesty law due to concerns about tax compliance, money laundering, and governance risks.

### Authorities’ views on fiscal plans
- Authorities reaffirmed commitment to fiscal prudence, transparency, and accountability.
- MTRS adoption delayed due to two consecutive shocks; expect to complete and adopt a MTRS after the elections.
- Indicated a revenue objective of 2.3-3 percent of GDP for the MTRS and confidence that revenue administration efforts would bring sizeable gains in 2021 despite MTRS delays.
- Expect the 2021 budget deficit to be 5½-6 percent of GDP, lower than the legal limit of 6½ percent due to initially incorporated buffers and possible under-executed spending.
- Priority in the medium term remains returning to reduction of public debt and containment of fiscal risks.
- Will not pass the tax amnesty law until concerns are addressed.
- Supreme Audit Institution plans to audit earthquake- and pandemic-related spending in 2021, including procurement procedures and ex-post validation of delivery.
- New law for the Register of Beneficiary Owners entered into force in September and a public register of beneficial owners will be established within the first half of 2021.

### Financial sector risks and policy recommendations
- Banking system remained liquid and stable but pockets of vulnerabilities persist; resilience will be tested by the shocks.
  - Credit growth reached 6.3 percent (y-o-y) in September.
  - NPLs at 8.3 percent of total loans in September remain high compared to regional peers and vary across banks.
  - Average capital adequacy ratio was 18.6 percent in September, above regulatory requirements (12 percent plus add-on for some banks), though a few banks’ capital ratios are only marginally above requirements.
  - Net profit of the banking system declined considerably in 2020.
- Near-term priorities:
  - Closely monitor and guide banks’ restructuring of credit portfolios; support prudent restructuring where necessary.
  - BOA should guide and monitor quality of restructurings and maintain loan classification and provisioning rules to appraise potential losses accurately.
  - Retain restriction on dividend distributions through end-2020 until full impact of shocks is known and banks’ capital position is assessed under local regulations and IFRS-9.
  - Allow temporary capital shortfalls only with a credible capital restoration plan.
- Prepare for a likely surge in NPLs and improve resolution framework by:
  - operationalizing and enforcing insolvency and resolution framework;
  - implementing regulatory framework for out-of-court loan restructuring;
  - progressing in bailiff reform;
  - improving judicial process for speedy recovery of loans and effective execution of collateral.
- Continue vigilance through onsite and offsite supervision, with more frequent on-site inspections for higher-risk banks and timely off-site monitoring of delinquent loans and recovery rates.
- Implement upgraded regulatory measures with a sufficiently long phase-in period to avoid procyclicality and disruptions during the pandemic.
- Enhance regulatory and legal frameworks on licensing, transfer of significant ownership, and related-party lending to address risks from shifts in significant bank ownership toward individuals and non-financial corporates.

### Contingency planning in case of a more severe pandemic
- Staff supports accommodative monetary policy stance and flexible exchange rate policy.
  - BOA should maintain monetary accommodation and keep domestic financial market liquid; scope for further loosening is limited as policy rate is close to the zero bound.
  - Benefits and costs of unconventional policy instruments should be carefully weighed, considering implications on the exchange rate, euroization, and bank balance sheets.
- Given elevated public debt, authorities will need to target new measures to ensure adequate health care provision, protect the most vulnerable, and identify options for budget reallocations and additional official financing.
- Exchange rate should remain a shock absorber; FX interventions should be limited to alleviate disorderly market conditions and dampen balance sheet impact of large depreciations.
- NPLs could rise further in a more severe pandemic; BOA should intensify monitoring and management of financial sector risks.
- If heightened balance of payments pressures and financial stability concerns materialize, authorities should be ready to take further measures as needed to preserve macroeconomic and financial stability.

### Staff appraisal (summary)
- Albania has maintained macroeconomic and financial stability so far despite two large shocks.
- Authorities responded promptly with mostly targeted measures.
- Accommodative monetary policy stance and flexible exchange rate policy are appropriate.
- Economy expected to contract sharply in 2020, followed by a gradual recovery in 2021-22, with major uncertainty and rising downside risks as a second wave is gripping many countries in Europe.

*Source: IMF staff report section titled "14.      Fiscal policy should balance supporting the economy and addressing Albania’s" (selected chapter content).*

### 34.      Albania’s capacity to repay the Fund is adequate, but risks have risen in light of the

### 34.      Albania’s capacity to repay the Fund is adequate, but risks have risen in light of the

### Capacity and risk overview
- Albania’s capacity to repay the Fund is adequate, but risks have risen in light of the shocks.
- Important shock absorbers:
  - sizeable reserve coverage
  - flexible exchange rate
- Key risks (aside from a more severe pandemic):
  - elevated fiscal deficits and public debt
  - weaknesses in management of public finances
  - a relatively high level of NPLs and euroization
- Managing these risks amid large uncertainty will require:
  - continued support for the economy
  - gradually rebuilding room for policy maneuver as the recovery becomes entrenched
  - close supervision of the financial sector

### Support measures, fiscal stance, and liquidity
- Support for people and firms hurt by the shocks is warranted, but should be temporary and targeted, subject to transparency and accountability.
- The projected sizable increase of the fiscal deficit in 2020 is warranted.
- PFM short-cuts during the emergency should be regularized as soon as possible and reconstruction funds should be subject to adequate PFM controls.
- Support for the economy, including earthquake reconstruction, needs to continue in 2021, but with the projected recovery of activity the authorities should:
  - aim to achieve a larger deficit reduction than is consistent with their budget
  - given growing downside risks, maintain a sizeable liquidity buffer for contingencies
- Authorities need to make room for supporting essential activities and protecting the most vulnerable by:
  - containing non-priority spending
  - improving spending efficiency
- The recent amendment to the fiscal rules is welcome.

### Public finance reforms and revenue measures
- The authorities should redouble their efforts to address structural weaknesses in public finances.
- Higher revenue is critical to sustain the higher spending needs of the people and the economy.
- Policy actions recommended:
  - adopt and implement a sound MTRS without further delays
  - avoid frequent and ad hoc changes to the tax policy
  - take some modest revenue measures in 2021 and build on them substantially over time to recreate room for fiscal policy maneuver
  - strengthen public investment management and the quality of public spending urgently
  - contain and manage increasing fiscal risks, including from PPPs and the recent government guarantees
  - avoid new arrears
  - continue efforts to strengthen the AML/CFT framework
  - avoid tax amnesty schemes

### Financial sector stability and supervisory priorities
- Strong efforts are warranted to safeguard financial stability while supporting borrowers hit by the shocks.
- Prudent loan restructurings by banks are necessary to support the economy.
- Given the exceptionally large size of the shocks and that their full impact may only be visible on banks’ balance sheets after some time:
  - supervisors must monitor banks closely and manage the risks carefully
  - a near-term priority for the BOA is to monitor and guide banks’ restructuring of credit portfolios
- Restrictions on bank dividend distributions should be retained until banks’ capital position is assessed to be sufficient to absorb the losses from the shocks.
- The authorities should continue to:
  - improve the NPL resolution framework
  - align the regulatory framework with international standards
  - manage risks from related-party lending and large exposures

*Source: IMF staff text.*

### 38.      The nature of the pandemic highlights the importance of contingency planning. In

### 1albea2020002 - 38.      The nature of the pandemic highlights the importance of contingency planning. In

### Contingency planning and policy response
- The nature of the pandemic highlights the importance of contingency planning.
- In case of a more severe pandemic, authorities will need to:
  - target new measures to ensure adequate health care provision and protect the most vulnerable;
  - identify options for budget reallocations and additional official financing;
  - keep the domestic financial market liquid.
- Authorities should stand ready to take these and any further measures that may be warranted to preserve macroeconomic and financial stability.

### Real sector developments
- The earthquake in Q4 2019 and the pandemic in 2020 have severely affected growth, especially through their impact on services.
- The two shocks have negatively affected domestic demand, which has been the main driver of growth in recent years.
- The two shocks are estimated to result in a 7 percent permanent output loss in 2025.
- Headline inflation picked up on food prices during the lockdown but is now negatively impacted by fuel prices.
- The upward trend in participation rates has reversed due to the shocks.
- Unemployment indicators have started to move against the trends in recent years.
- Albania GDP Forecast (Lek billion): chart shows divergence of October 2019 real GDP forecast and current real GDP forecast through 2025.
- Consumer Price Index (eop): 2.2 (2016), 1.8 (2017), 1.8 (2018), 1.1 (2019), 1.0 (2020), projections: 2.6 (2021 RFI), 2.2 (2021 Budget), 2.9 (2022), 2.5 (2023), 2.9 (2024), 3.0 (2025).
- Real GDP growth (selected): 2016: 3.3; 2017: 3.8; 2018: 4.1; 2019: 2.2; 2020: -7.5; 2021 RFI: -5.0; 2021 Budget: 5.4; 2022: 8.0; 2023: 5.0; 2024: 4.4; 2025: 3.5.

### Monetary sector developments
- Inflation has been below the target for more than 8 years despite a historically accommodative monetary stance.
- Banks continue to hoard Lek liquidity at the central bank while currency in circulation, deposits, and broad money keep growing.
- Low funding costs, liquid financial system, and measures to alleviate the impact of the two shocks on borrowers have supported private sector credit growth, though private sector credit to GDP ratio remains low.
- Headline and Core Inflation (Percent, Y/Y): series shown; inflation target referenced.
- Interest rates (Percent): policy rate, Albania: 12M T-Bill yield, Lek lending rate shown across 2010–2020.
- Commercial banks: reserves at the central bank (Lek billions) show FX required/excess and Lek required/excess series.
- Money supply (Percent, Y/Y) M1/M2/M3 series across 2011–2020.
- Credit to Domestic Private Sector (Percent, Y/Y): Lek and FX series; private credit growth figures in Table 4a: Private sector credit growth (% change): 0.4 (2016), -0.8 (2017), -0.9 (2018), 6.1 (2019), 4.9 (2020), RFI 2021: -2.5, RFI 2021 (alternate): 1.8, 2022: 11.4, 2023: 6.4, 2024: 8.7, 2025: 6.6.
- Private Credit to GDP, 2019 (Percent of GDP): chart shows Albania among lowest in region (exact country labels in figure).

### External sector developments
- The current account deficit is expected to widen considerably in 2020 due to lower tourism receipts, remittances, and exports, reversing several years of improvement in the services balance driven primarily by tourism growth.
- Growth of goods exports in 2019 came to a halt and turned negative in H1 2020 due to lower textile and energy exports.
- Import growth turned negative in 2020 reflecting the economic downturn.
- Albania’s real effective exchange rate appreciation has leveled off in 2020 while the country has continued to accumulate FX reserves.
- Current Account Balance (Percent of GDP): -7.6 (2016), -7.5 (2017), -6.8 (2018), -8.0 (2019), -10.6 (2020), RFI 2021: -11.2, RFI 2021 (alt): -8.3, 2022: -8.1, 2023: -7.9, 2024: -7.8, 2025: -7.7.
- Gross reserves (millions of euros): 2,945 (2016), 2,996 (2017), 3,399 (2018), 3,360 (2019), 3,465 (2020), RFI 2021: 2,860, 2021 RFI alt: 3,200, 2022: 3,262, 2023: 3,612, 2024: 3,611, 2025: 4,158, 4,239 (table variations reflect series entries).
- Balance of Payments (millions of euros): Current account: -812 (2016), -866 (2017), -866 (2018), -1,089 (2019), -1,332 (2020), RFI 2021: -1,428, 2021 RFI alt: -1,060, 2022: -1,122, 2023: -1,077, 2024: -1,147, 2025: -1,206.

### Fiscal sector developments
- Fiscal balances improved until 2019 but a significant worsening is expected in 2020 driven by lower revenue and spending increases.
- Albania’s public debt remains high. Sovereign spreads jumped after the outbreak but have come down somewhat.
- Higher revenues are needed to support fiscal consolidation and improve debt affordability given high gross financing needs.
- Overall balance (Percent of GDP): -2.0 (2016), -2.0 (2017), -1.3 (2018), -2.0 (2019), -6.8 (2020), RFI 2021: -5.4, RFI 2021 (alt): -6.1, 2022: -3.1, 2023: -3.0, 2024: -2.0, 2025: -2.0 (Table 2a).
- Total revenue and grants (Percent of GDP): 27.6 (2016), 27.8 (2017), 27.5 (2018), 27.4 (2019), 25.3 (2020), 26.3 (2020 RFI), 26.9 (2021 RFI), 28.5 (2021 Budget), 26.9 (2022 onward forecast ~26.7–26.9).
- Tax revenue (Percent of GDP): 25.1 (2016), 25.7 (2017), 25.6 (2018), 25.4 (2019), 23.2 (2020), projections show gradual recovery to ~25.2–25.4 in later years.
- Total expenditure (Percent of GDP): 29.6 (2016), 29.7 (2017), 28.8 (2018), 29.4 (2019), 32.1 (2020), RFI 2021: 31.7, RFI 2021 (alt): 33.0, 2022: 29.9, 2023: 29.8, 2024: 28.9, 2025: 28.6.
- General Government Debt (Percent of GDP): 73.3 (2016), 71.9 (2017), 69.5 (2018), 67.8 (2019), 81.9 (2020), RFI 2021: 75.6, RFI 2021 (alt): 81.5, 2022: 70.7, 2023: 79.6, 2024: 75.3, 2025: 73.5 (Table 2a).

### Banking sector developments
- Albania’s NPL ratio has declined over time but remains relatively high.
- Capital of all banks are above regulatory ratio, although buffers are declining slightly.
- The two shocks have weighed on bank profitability.
- A large share of FX loans is unhedged.
- Banks are exposed to sectors most impacted by the earthquake and pandemic.
- Albania remains one of the most euroized economies in the region.
- Key indicators (Table 5, selected):
  - Regulatory capital as a percent of risk-weighted assets: 16.2 (Dec-12), 18.0 (Dec-13), 16.8 (Dec-14), 15.7 (Dec-15), 15.7 (Dec-16), 16.6 (Dec-17), 18.3 (Dec-18), 18.3 (Dec-19), 18.6 (Sep-20).
  - Nonperforming loans (gross) as percent of total loans: 22.5 (Dec-12), 23.5 (Dec-13), 22.8 (Dec-14), 18.2 (Dec-15), 18.3 (Dec-16), 13.2 (Dec-17), 11.1 (Dec-18), 8.4 (Dec-19), 8.3 (Sep-20).
  - Return on assets (ROA): 0.3 (Dec-12), 0.5 (Dec-13), 0.9 (Dec-14), 1.2 (Dec-15), 0.7 (Dec-16), 1.5 (Dec-17), 1.3 (Dec-18), 1.4 (Dec-19), 1.0 (Sep-20).
  - Foreign currency-denominated loans to total loans: 64.5 (Dec-12), 63.0 (Dec-13), 62.4 (Dec-14), 60.8 (Dec-15), 58.6 (Dec-16), 56.4 (Dec-17), 56.1 (Dec-18), 51.2 (Dec-19), 50.0 (Sep-20).

### Electricity sector
- After a strong year in 2018, electricity generation was negatively affected by the drought in 2019 and the twin shocks in 2020.
- Bill collection in 2020 was adversely affected during the lockdown but has recovered.
- Despite a spike in March 2020, distribution losses in 2020 have declined from highs in 2014–2016.
- Owing to reliance on low-cost hydropower and despite persistent sector financial problems, household tariffs are among the lowest in Europe (Electricity Prices for Household Consumers: Albania positioned among lowest in chart comparing countries; values shown in Euro per kWh series).

### Macroeconomic framework and key statistics (selected from Table 1)
- Real GDP growth (percent change): 3.3 (2016), 3.8 (2017), 4.1 (2018), 2.2 (2019), -7.5 (2020), -5.0 (2021 RFI), 5.4 (2021 Budget), 8.0 (2022), 5.0 (2023), 4.4 (2024), 3.5 (2025).
- Consumer Price Index (avg.): 1.3 (2016), 2.0 (2017), 2.0 (2018), 1.4 (2019), 1.4 (2020), projections: 2.4 (2021 RFI), 1.6 (2021 Budget), 2.8 (2022), 2.4 (2023), 2.7 (2024), 2.9 (2025).
- Trade balance (goods and services, Percent of GDP): -16.8 (2016), -15.1 (2017), -13.7 (2018), -13.8 (2019), -15.5 (2020), -17.2 (2021 RFI), -14.1 (2021 RFI alt), -14.0 (2022), -13.7 (2023), -13.4 (2024), -13.2 (2025).
- Gross international reserves (billions of Euros): 2.9 (2016), 3.0 (2017), 3.4 (2018), 3.4 (2019), 3.5 (2020), projections: 2.9 (2021 RFI), 3.2 (2021 RFI alt), 3.3 (2022), 3.6 (2023), 3.6 (2024), 4.2 (2025).
- General government debt (Percent of GDP): see Fiscal sector section (Table 2a).

*Source: Albanian authorities; and IMF staff estimates and calculations.*

### Annex I. Policy Responses to the Earthquake and Covid-19

### Annex I. Policy Responses to the Earthquake and Covid-19 Pandemic

### Overview
- Support packages to deal with the immediate impact of the Covid-19 pandemic totaled 2.9 percent of the GDD (1.2 percent of GDP on the budget and 1.7 percent off the budget, respectively) in the first two budget revisions.  
- The earthquake reconstruction efforts were ramped up in the third budget revision in July to 2.2 percent of GDP.  
- Information is as of October 2020.

### Earthquake Reconstruction Fund (Lek34 billion or 2.2 percent of GDP)
- Albania was hit by an earthquake of magnitude 6.4 in November 2019, the strongest in decades.  
- The earthquake caused 51 victims and damages to the tune of 7 percent of GDP.  
- An international donor conference hosted by the EU in February secured pledges of €1 billion in loans and grants; many pledges are in kind or related to projects.  
- Initial 2020 budget allocation: Lek20 billion (1.2 percent of GDP) for reconstruction, to be financed by Lek7 billion in grants and the rest from the budget.  
- In the third budget review, expectations for grant disbursements were lowered to Lek3 billion received so far and overall spending was increased to Lek34 billion (2.2 percent of GDP).

### Covid-19 Support Measures

I. Fiscal

On-budget measures (Lek19 billion or 1.2 percent of GDP)
- Additional spending for the health sector of Lek2.5 billion to support purchase of new equipment and the repurposing of hospitals, bonuses for front line health workers. As of September, some 35% of this amount has been spent.  
- A package of Lek6.5 billion for wage and social support that included support of small businesses/self-employed forced to close activities due to the COVID-19 pandemic by paying them minimum salaries (up to two in the case of family businesses with unpaid family members) for 3 months; the doubling of the unemployment benefits and social assistance layouts for 3 months. As of September, about 95% of these funds were disbursed.  
- Lek2 billion of defense spending reallocated toward humanitarian relief for the most vulnerable. This reallocation was later cancelled.  
- A Lek7 billion one-off transfer of Lek40,000 to employees of small businesses affected by the pandemic not covered in the first package, to employees of large businesses laid off due to the pandemic, and employees in the tourism sector. An additional support of one-month minimum wage was offered in August to workers of public transport, whose opening was delayed by a month. The cost of Lk0.1bn was financed by reallocations. As of September, 97% of these funds were disbursed.  
- Increase of Lek1 billion in the reserve and contingency fund for Covid-19 related expenses.  
- Deferred taxes—All large companies (except banks, telecommunication, public enterprises and other essential businesses) can defer payment of profit tax for the second and third quarter of 2020 in 2021. Tourism, active processing and call centers can defer payments for the rest of 2020 to 2021.  
- Foregone revenue—Small businesses with annual turnovers below Lek14 million will not pay profit tax for the remainder of 2020 (Lek80 million).

Off-budget measures (Lek26 billion—1.7 percent of GDP)
- The government established two unfunded standardized guarantee schemes to support businesses.  
  - A sovereign guarantee fund of Lek 11 billion (0.6 percent of GDP) for large companies to access overdrafts in the banking system to pay wages for their employees for up to 3 months, with an interest rate capped at 2.85 percent and a maturity of up to 2 years. The government will bear the interest costs. The take up of the scheme is 59 percent.  
    - Note: This payment is on the budget, estimated at maximum of Lek92 million for 2020.  
  - A recovery fund guarantee scheme of Lek15 billion (1 percent of GDP) to provide loans for working capital and investments for all private companies that were tax-compliant and solvent before the pandemic. The government will guarantee 60 percent of the loans, and interest is capped at 5 percent for a maturity of up to 5 years. The take up of the scheme is 42 percent.

II. Monetary and Financial Measures
- Monetary policy: On March 25th, the Bank of Albania cut its key policy rate—the weekly repo rate—by 50 basis points to a new historic low of 0.5 percent. It also reduced the interest rate for the overnight lending facility from 1.9 percent to 0.9 percent.  
- The central bank switched its open market operations from fixed amount of liquidity to unlimited amounts with a fixed price for as long as necessary to ensure liquidity to the banking system.  
- Moratoriums and regulatory forbearance measures: The Bank of Albania introduced a loan repayment moratorium through end-August, enabling borrowers to ask banks and other financial institutions to defer loan installments without penalties. Almost 40% of the loan portfolio of banks benefited from the opt-in moratorium. The BOA also adopted regulations to allow banks to restructure loans within 2020 without additional provisioning or downgrades for borrowers’ status. Entry in force of more stringent classification and provisioning measures for reclassified loans was postponed by one year to January 1, 2022. Out of court restructuring for distressed borrowers under a special regulation will be possible for an additional year until January 1, 2022.  
  - The moratorium for non-bank financial institutions lasted only till May 31st.  
- The Bank of Albania suspended banks’ dividend payments through end-2020.  
- FX interventions: In end-March the BOA intervened by selling €20.4m to smooth temporary excessive volatility caused by initial disruptions due to the lockdown measures (including lack of physical cash as a result of halted flights).  
- On April 1st, the BOA amended the capital adequacy regulation, lowering the risk-rating of euro-denominated securities issued in 2020 from 50 percent to zero. This was done prior to the April 6th government auction, in which 100 million euro-denominated government securities were issued in the domestic market.  
- On April 8, the BOA decided to temporarily remove any commissions applied by banks on the non-paper based credit transfers in Lek from their clients and the fees charged to participants in the BOA payment systems to further promote home banking services, especially during the lockdown.

*Source: Annex I. Policy Responses to the Earthquake and Covid-19 (information as of October 2020).*

### 2020. In line with this, total public and private external debt service is expected to increase

### Albania — Debt Service and Public Sector DSA (2020–2025)

### Debt service, composition, and financing needs
- Total public and private external debt service is expected to increase to 18 percent of GDP in 2020 but to fall to 14 percent by 2024 before increasing again to 17 percent with large amortization payments in 2025.
- The recent issuance of €650 million Eurobond helps meet the gross financing needs in 2020.
- Commercial debt as a percentage of total public sector debt is expected to increase from 13 percent at end-2019 to 19 percent by end-2020, 25 percent in 2022, and 34 percent in 2025.
- Public gross financing needs (selected projections, in percent of GDP):
  - 2020: 21.6 (table/figure header)
  - 2021: 20.7
  - 2022: 24.1
  - 2023: 20.1
  - 2024: 20.2
  - 2025: 22.0
- Public gross financing needs (Figure 2 projection series) also displayed across 2018–2025 with a peak in projection years.

### Stress tests and scenario outcomes
- Under a 30 percent exchange rate depreciation shock:
  - External debt would peak at 106 percent of GDP in 2021 before declining to 89 percent by 2025.
- Following a shock to the current account of half a standard deviation (around 1 percent of GDP):
  - External debt would peak at 73 percent of GDP in 2021 and gradually decline to 64 percent by 2025.
- External debt bound-test highlights:
  - Real depreciation shock (one-time 30 percent in 2020) results shown with external debt peaking at 89 percent (figure/box).
  - Combined shocks and individual i-rate, CA, and growth shocks produce higher debt paths (figures showing alternative peaks: e.g., combined shock 63, CA shock 64, growth shock 61, historical scenario 82 in figures).

### Public DSA — baseline projections and contributing flows
- Nominal gross public debt (in percent of GDP), selected years:
  - 2018: 66.7
  - 2019: 69.5
  - 2020: 67.8
  - 2021: 81.9
  - 2022: 81.5
  - 2023: 79.6
  - 2024: 75.3
  - 2025: 73.5 (figure table)
- Change in gross public sector debt (cumulative, percent of GDP), selected years:
  - 2018: 1.9
  - 2019: -2.4
  - 2020: -1.7
  - 2021: 14.1
  - 2022: -0.4
  - 2023: -1.9
  - 2024: -4.3
  - 2025: -1.8
- Identified debt-creating flows (cumulative contributions, percent of GDP):
  - Primary deficit contributors (primary deficit, percent of GDP):
    - 2018: 1.1
    - 2019: -0.9
    - 2020: -0.1
    - 2021: 4.7
    - 2022: 4.0
    - 2023: 0.9
    - 2024: 0.0
    - 2025: 0.0
  - Automatic debt dynamics (percent of GDP):
    - 2018: 0.9
    - 2019: -3.5
    - 2020: 0.2
    - 2021: 7.7
    - 2022: -1.6
    - 2023: -4.4
    - 2024: -3.4
    - 2025: -2.3
  - Other identified debt-creating flows (percent of GDP):
    - 2018: 0.2
    - 2019: 1.8
    - 2020: -1.0
    - 2021: 1.0
    - 2022: -2.3
    - 2023: 1.7
    - 2024: -0.7
    - 2025: 1.1
- Key macro assumptions (baseline, selected series):
  - Real GDP growth (in percent):
    - 2020: -7.5
    - 2021: 5.4
    - 2022: 5.0
    - 2023: 4.4
    - 2024: 3.5
    - 2025: 3.4
  - Inflation (GDP deflator, in percent):
    - 2020: 1.2
    - 2021: 1.5
    - 2022: 2.1
    - 2023: 2.5
    - 2024: 2.7
    - 2025: 3.0
  - Effective interest rate (in percent):
    - 2020: 3.1
    - 2021: 2.6
    - 2022: 2.7
    - 2023: 2.9
    - 2024: 3.1
    - 2025: 3.3
  - Primary balance (percent of GDP):
    - 2020: -4.7
    - 2021: -4.0
    - 2022: -0.9
    - 2023: 0.0
    - 2024: 0.0
    - 2025: 0.0

### External debt sustainability metrics (Table 1 and figures)
- Baseline external debt (in percent of GDP), selected years:
  - 2015: 72.9
  - 2016: 70.0
  - 2017: 72.1
  - 2018: 62.8
  - 2019: 60.1
  - 2020: 72.4
  - 2021: 71.2
  - 2022: 71.7
  - 2023: 66.1
  - 2024: 65.2
  - 2025: 59.5
- Change in external debt (percent of GDP), selected years:
  - 2015: 8.4
  - 2016: -2.9
  - 2017: 2.0
  - 2018: -9.3
  - 2019: -2.7
  - 2020: 12.3
  - 2021: -1.2
  - 2022: 0.5
  - 2023: -5.7
  - 2024: -0.8
  - 2025: -5.7
- Identified external debt-creating flows (percent of GDP):
  - Current account deficit, excluding interest payments:
    - 2015: 7.7
    - 2016: 6.8
    - 2017: 6.7
    - 2018: 5.9
    - 2019: 6.8
    - 2020: 10.5
    - 2021: 7.2
    - 2022: 7.0
    - 2023: 7.0
    - 2024: 6.9
    - 2025: 6.7
  - Net non-debt creating capital inflows (negative sign in table):
    - 2015: -8.0
    - 2016: -8.7
    - 2017: -8.6
    - 2018: -8.0
    - 2019: -7.6
    - 2020: -5.7
    - 2021: -6.2
    - 2022: -7.0
    - 2023: -7.5
    - 2024: -7.5
    - 2025: -7.6
- Automatic debt dynamics (percent of GDP), selected years:
  - 2015: 11.4
  - 2016: -2.1
  - 2017: -5.6
  - 2018: -9.1
  - 2019: 0.3
  - 2020: 5.7
  - 2021: -3.3
  - 2022: -3.2
  - 2023: -2.3
  - 2024: -1.6
  - 2025: -1.7
- External debt-to-exports ratio (in percent), selected years:
  - 2015: 267.4
  - 2016: 241.5
  - 2017: 228.1
  - 2018: 198.3
  - 2019: 190.4
  - 2020: 351.0
  - 2021: 272.6
  - 2022: 252.1
  - 2023: 213.4
  - 2024: 211.9
  - 2025: 192.8
- Gross external financing need (in billions of US dollars, and in percent of GDP):
  - 2015: $3.4 / 30.2 percent of GDP
  - 2016: $2.8 / 23.8 percent of GDP
  - 2017: $3.0 / 23.0 percent of GDP
  - 2018: $3.6 / 23.8 percent of GDP
  - 2019: $3.5 / 23.2 percent of GDP
  - 2020: $4.2 / 29.4 percent of GDP (table indicates 10-Year/10-Year in formatting)
  - 2021: $3.7 / 23.5 percent of GDP
  - 2022: $3.8 / 22.2 percent of GDP
  - 2023: $4.2 / 22.7 percent of GDP
  - 2024: $4.1 / 20.6 percent of GDP
  - 2025: $5.0 / 23.6 percent of GDP

### Risk assessment, realism, and stress-test heat map
- Debt burden benchmarks and stress-test color coding:
  - Debt burden benchmark of 70 percent of GDP used for heat-map coloring.
  - Gross financing needs benchmark of 15 percent of GDP used for external financing risk coloring.
- Public DSA risk assessment highlights (Figure 5):
  - Indicators include bond spread (bp), external financing requirement (percent of GDP), annual change in short-term public debt (percent), public debt in foreign currency (percent of total), public debt held by non-residents (percent of total).
  - Bond spread over German bonds based on the 7-year eurobond issued in October 2018; last available observation as of November 2, 2020 used in assessments.
- Realism of baseline assumptions (Figure 3):
  - Historical forecast track record and distribution of forecast errors shown for Real GDP growth, Primary Balance, and Inflation (Deflator) with percentile ranks and comparisons to medians.

*Source: IMF staff.*

### Annex V. Recent Developments in Financial Regulations

### Annex V. Recent Developments in Financial Regulations

### Bank Capital Standards
- Increase of Tier 1 capital requirement [2019]
- Further alignment with Capital Requirement Regulation (CRR) requirements [2020]
- Basel III Leverage Ratio [Planned, 2020]
- Notes:
  - Minimum capital adequacy ratio in Albania is set at 12% (vs. 8% in Basel standards) and can be higher for specific banks with known issues.
  - FX unhedged loans are subject to an additional risk weight of 50%, subject to total risk weight not exceeding 200%.
  - The required ratio between Tier 1 capital and risk weighted assets increases from 4.5% to 6.75%, and the ratio between tier 1 capital and risky exposures increases from 6% to 9%.

### Bank Liquidity Standards
- Basel III Liquidity Coverage Ratio [2019]
- Basel III Net Stable Funding Ratio [Planned, 2020]
- Internal Liquidity Adequacy Assessment Process [Planned, 2021]
- Note:
  - LAR is set at a minimum level of 15% for local currency and 20% for foreign currency, while it is set at 20% for the aggregate position, in line with Albania’s de-euroization package.

### Bank Supervision
- Increase in the frequency of on-site and off-site supervision and tighter reporting requirements for banks with recent change in shareholder structure [2019]
- Pillar 2 Supervisory Review and Evaluation Process (SREP) [Planned, 2020]
- Further enhancements to off-site monitoring of banks’ delinquent loans and recovery rates [Planned, 2020]

### Macro‑Prudential Frameworks
- Methodology on enhanced monitoring of systemic risks through a Systemic Risk Heat Map [2019]
- Countercyclical capital buffer framework [2019]
- Capital conservation buffer framework [2019]
- Framework for identification of domestic systemically important banks (D-SIBs) and higher loss absorbency requirement for them [2019]

### Other Bank Regulations and Guidelines
- Amendments to the regulation on the prevention of money laundering and terrorist financing [2019]
- Enhancements to the regulation on licensing and transfer of significant ownership [2019]
- Guidelines on stress testing [2019]
- Regulation on the out-of-court treatment of distressed borrowers by banks [2019]
- Amendments to the regulation on credit risk management from banks and branches of foreign banks [2019]
- Regulation on the conditions for granting prior approval for the financial support agreement within the banking group [2020]
- Alignment of Albanian large exposures regulations with the Basel supervisory framework for measuring and controlling large exposures [2020]
- Guidelines on market risk management and regulation on interest rate risk in banking book [Planned, 2020]
- Note:
  - Amendments to the regulation on credit risk management from banks and branches of foreign banks adjust the restructured loans provision requirement (delayed entrance into force by January 1, 2022) and reduce the period for loss loans obligatory write-off from three years to two years.

### Regulatory Framework for Capital Market and Investment Funds
- New capital market law, aligning with EU regulations [2020]
- New law for collective investment undertakings [2020]
- New investment funds law, converging with EU regulations and clarifying licensing, supervision, and investors and consumer protection [2020]

*Source: Annex V. Recent Developments in Financial Regulations.*

### 2020. The 2020 budgetary deficit (8.4 percent of GDP) is fully financed. Despite a likely

### 1albea2020002 - 2020. The 2020 budgetary deficit (8.4 percent of GDP) is fully financed.

### Fiscal position and financing
- The 2020 budgetary deficit is 8.4 percent of GDP and is fully financed.
- Authorities expect to keep domestic financing comfortably below 3 percent of GDP over the next 5 years.
- A new Eurobond issue is planned for 2022.

### Treasury Single Account (TSA) and liquidity management
- Authorities have implemented Fund TA recommendations on liquidity management and an earlier recommendation on better managing the TSA.
- TSA balances were only slightly above the envisaged 1 percent of GDP upper bound of the recommended range ceiling (ALL 15-20 billion range); going forward the level should be comfortably within the foresaw range.

### VAT arrears and tax administration
- Stock of VAT arrears to small taxpayers has been almost totally repaid, with the exception of ALL 79 million, and will not weigh on the business climate.
- Remaining stock of ALL 12 billion is due to just three large taxpayers and are in the process to be cleared by mid-2021.
- Authorities believe that the potential adverse effects of arrears on market perception and business climate will not materialize.
- Authorities have started an in-depth reorganization of the tax system and will consider staff’s advice on rationalization.
- The tax amnesty law is being reviewed by a parliamentary commission and will take into account comments from Money Val, the European Commission, and other stakeholders.
- Authorities have stepped up efforts to address remaining deficiencies highlighted by the Money Val assessment. MOFE is moving ahead with the related action plan; main actions regard: land registry, beneficiary owner register, data sharing, licensing process supervision, sanctions enforcement, and management of seized/confiscated assets.

### Monetary policy stance and measures
- BoA eased monetary policy and applied targeted macro-prudential stimulus in response to adverse shocks.
- Monetary stimulus measures:
  - Policy rate cut to a new historical low of 0.5%.
  - Switch to fixed-price full-allotment liquidity injection operations.
- Regulatory accommodation measures:
  - Temporary relaxation of credit provisioning rules to encourage credit restructuring.
  - Time-limited deferral of loan installment payments.
- Objectives: reduce debt-servicing costs, encourage new lending, and improve cash-flow of crisis-hit businesses.
- Resulting developments:
  - Volatility and risk premia in domestic financial markets stabilized quickly.
  - Credit to the private sector continued to grow, facilitating liquidity for businesses and households.

### Inflation outlook, banking sector, and supervisory stance
- BoA expects a subdued inflation profile in the coming year, followed by a gradual increase towards its 3 percent target by end 2022.
- Projection drivers: gradual improvement in the cyclical position, favorable domestic financial conditions, improving external demand, and growing confidence.
- Banking sector described as sound, liquid and well-capitalized.
- BoA stress-tests indicate the banking sector is robust enough to withstand the crisis impact (which is yet to be fully materialized).
- BoA will step up on- and off-site supervision in compliance with its risk-based approach and will normalize its macroprudential policy stance within 2020.
- BoA aims to promote transparency of bank balance sheets to identify weaknesses and undertake timely remedial action.
- Monetary accommodation will be gradual and data-driven; any normalization will account for the expected gradual withdrawal of fiscal stimulus over the next couple of years.
- BoA will continue to provide market guidance on the likely path of the policy interest rate and the rationale behind decisions.

### Balance of risks and unconventional instruments
- Balance of risks remains on the downside.
- Additional conventional monetary policy space remains but is limited and likely to run into diminishing returns.
- BoA would consider unconventional instruments as a last resort, only under extreme circumstances, after cost-benefit analysis and consultation with IMF staff.
- Under current analysis, a potential quantitative easing program offers the best cost-benefit profile: raise liquidity, lower risk premia, and promote bank lending.
- BoA concurs with staff that QE adoption should not constitute unlimited financing of the deficit and that clear communication would be key.
- Deployment of unconventional instruments will account for the nature of the shock and relative effectiveness of policy instruments.

### Institutional investors, insurance, and funds
- Impact of the twin shocks on institutional investors has been very limited.
- Stress tests to assess the COVID impact showed good performance and stable prospects.
- Health-related insurances have not been subject to additional pressures because COVID cases are treated only in public hospitals (free of charge).
- On the earthquake impact:
  - Some administrative delays on demolition decisions by local authorities.
  - No liquidity issues in the insurance market as only 2.5 percent of impacted building was insured (usually because of existing bank loans).
- Investment funds were required to update their key risk assessment as they will not be protected by COVID-related public guarantee scheme.

### Energy sector reform
- Authorities are advancing energy sector reform with support from the World Bank-backed consolidation plan.
- Road map toward liberalization and installation of the free market and power exchange (APEX) is progressing according to the timeline (should be in place in Q2 2021).
- New framework will meet EU regulation requirements on independent compliance while maintaining a universal supplier with de-regulated prices to compensate for temporary lower supply.
- Envisaged division of current public sector companies is progressing and should be completed at the end of the year.

*Source: 1albea2020002 - 2020. The 2020 budgetary deficit (8.4 percent of GDP) is fully financed.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1albea2020002.pdf_