## 1albea2021001 ## Source details **Canonical URL:** [1albea2021001](https://www.imf.org/-/media/files/publications/cr/2021/english/1albea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1albea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1albea2021001.pdf.json) --- ### Context and recent macro developments - Pandemic and shocks: - Mass vaccination started on April 2021; only one-third of the population is fully vaccinated. - About 80 percent of the available 2.5 million doses have been administered. - Albania experienced a major earthquake before the pandemic recovery. - 2020 outcomes: - Real GDP contracted by 4 percent in 2020. - Almost 45,000 jobs were lost. - Fiscal deficit widened to 6.8 percent of GDP. - Public debt increased to 77.2 percent of GDP. - Reserves increased to €3.9 billion at year-end (188 percent of ARA metric). - 2021 developments: - Real GDP growth projected at 7.8 percent in 2021; recovery broad‑based in 2021H1 (all sectors but agriculture positive). - Electricity production doubled in 2021Q1 vs 2020Q1 due to favorable weather. - January–September tourist arrivals reached 89 percent of the 2019 level. - Labor: participation and employment rates remain 1 percentage point below pre‑pandemic; unemployment 0.7 percentage point higher. - Headline CPI rose due to food and energy; core inflation increased only modestly. - Average wages grew by more than inflation in 2021Q2; minimum wage increased in January 2021. - Bank of Albania (BoA) policy rate maintained at 0.5 percent since March 2020; unlimited liquidity provision to banks extended through end‑2021 and expected to discontinue in 2022Q1. - Fiscal deficit widened by 0.7 percent of GDP in the fourth 2021 budget revision (July); staff projects a primary deficit of about 4½ percent of GDP in 2021. - General government debt projected slightly above 80 percent of GDP at end‑2021. - A €700 million Eurobond issuance planned before end‑2021. - BoA resumed FX reserve purchases; year‑end reserves projected toward €4.3 billion (176 percent of ARA metric). ### Outlook and key risks - Staff baseline projections: - Real GDP growth: 7.8 percent (2021); converging to potential of 3.4 percent over the medium run. - Inflation to settle at BoA’s 3 percent target over the medium run. - Fiscal outlook: - Primary deficit about 3.2 percent of GDP in 2022 under realistic revenue assumptions (staff baseline). - Staff projects primary deficit to decline to a zero balance by 2024 per the Organic Budget Law, implying a backloaded consolidation of about 2⅓ percent of GDP over three years. - Without additional adjustment, public debt will hover above 70 percent of GDP in the medium term; government gross financing needs about 21 percent of GDP annually. - Major downside risks: - Emergence of vaccine‑resistant variants or localized outbreaks. - Higher global energy prices. - Tighter global financial conditions and de‑anchoring of inflation expectations. - Exchange rate exposure from sizeable external debt and unhedged FX loans. - Mitigants: - Large reserve coverage; flexible exchange rate. - Upside: - Faster normalization from the pandemic. ### Fiscal policy stance and MTRS design (Medium‑Term Revenue Strategy) - Role of MTRS: - If fully operationalized, a sound MTRS can be expected to help boost revenues by 2.3 percent of GDP over four years. - Staff assumes a revenue gain of 0.3 percent of GDP in the baseline from revenue administration measures (e.g., fiscalization). - MTRS design priorities: - Replace piecemeal approach with a blueprint having a clear point revenue target and yearly revenue targets. - For each tax reform indicate objective, justification, timing, and expected revenue impact; accompany with an Action Plan. - Avoid tax amnesty and ad hoc tax cuts, exemptions, and incentives. - Create a dedicated tax policy unit in MOFE; ensure strong political leadership and stakeholder support. - IMF review of draft MTRS and 2022 Fiscal Package: - Draft MTRS estimated to leave a gap of ¾ percent of GDP to meet the lower bound of authorities’ revenue objective of 1 percent of GDP from tax policy reforms. - If IMF’s 2019 MTRS recommendations were fully considered, revenue gains could be at least 1.3 percent of GDP. - Staff recommends reducing turnover thresholds, establishing single registration thresholds for VAT and income tax, designing simplified regime equivalence, and reconsidering PIT bracket design to avoid marginal effective tax rate spikes. - Some 2022 Fiscal Package measures align with 2019 IMF recommendations; other measures (second reduced VAT rate, PIT structure) are problematic. ### Staff fiscal adjustment recommendations and numerical targets - Staff recommends a revenue‑based medium‑term adjustment to: - Achieve a primary deficit of about 2.4 percent of GDP in 2022. - Reach a primary surplus of 1½ percent of GDP in 2024. - Implications: - A total structural adjustment of about 3.8 percent of GDP over three years. - Meaningful consolidation starting in 2022 of about 1 percent of GDP to strengthen credibility. - 2022 policy measures recommended: - Remove tax loopholes and exemptions. - Reduce non‑priority, low‑efficiency spending and non‑targeted support. - Save windfall revenues to accelerate deficit and debt reduction. - Expected outcomes under staff preferred path: - General government debt could be brought back to below the pre‑pandemic level by 2026, assuming no new shocks. - If recovery weakens, higher targeted support should be deployed conditional on financing availability. - Authorities’ view: - Commit to fiscal consolidation but favor a more gradual adjustment; envisage MTRS that aims to raise 2.3–3 percent of GDP over four years; commit to achieving a primary balance of at least zero from 2024. ### Fiscal consolidation and medium‑term fiscal paths (selected figures from Text Table 3) - Tax revenues (Percent of GDP) - IMF staff baseline: 25.6 (2018), 25.2 (2019), 24.6 (2020), 25.6 (2021), 25.8 (2022), 25.8 (2023), 25.8 (2024), 25.8 (2025), 25.8 (2026) - IMF staff preferred path: 25.6 (2018), 25.2 (2019), 24.6 (2020), 25.6 (2021), 26.2 (2022), 27.0 (2023), 27.5 (2024), 27.8 (2025), 27.8 (2026) - Primary expenditure (excluding interest) (Percent of GDP) - IMF staff baseline: 26.6 (2018), 27.2 (2019), 31.0 (2020), 31.9 (2021), 30.8 (2022), 29.0 (2023), 27.6 (2024), 27.6 (2025), 27.5 (2026) - IMF staff preferred path: 26.6 (2018), 27.2 (2019), 31.0 (2020), 31.9 (2021), 30.4 (2022), 28.7 (2023), 27.8 (2024), 28.2 (2025), 28.5 (2026) - Overall balance (Percent of GDP) - IMF staff baseline: -1.3 (2018), -2.0 (2019), -6.8 (2020), -6.8 (2021), -5.4 (2022), -3.7 (2023), -2.3 (2024), -2.3 (2025), -2.4 (2026) - IMF staff preferred path: -1.3 (2018), -2.0 (2019), -6.8 (2020), -6.8 (2021), -4.6 (2022), -2.2 (2023), -0.8 (2024), -0.9 (2025), -1.4 (2026) - Primary balance (Percent of GDP) - IMF staff baseline: 0.9 (2018), 0.1 (2019), -4.7 (2020), -4.5 (2021), -3.2 (2022), -1.5 (2023), 0.0 (2024), 0.0 (2025), 0.0 (2026) - IMF staff preferred path: 0.9 (2018), 0.1 (2019), -4.7 (2020), -4.5 (2021), -2.4 (2022), 0.0 (2023), 1.5 (2024), 1.4 (2025), 1.0 (2026) - Public debt (Percent of GDP) - IMF staff baseline: 69.5 (2018), 67.3 (2019), 77.2 (2020), 80.6 (2021), 79.0 (2022), 78.6 (2023), 77.6 (2024), 75.5 (2025), 74.1 (2026) - IMF staff preferred path: 69.5 (2018), 67.3 (2019), 77.2 (2020), 80.6 (2021), 78.0 (2022), 76.1 (2023), 73.4 (2024), 69.3 (2025), 66.2 (2026) - Memorandum (Revenue gains under IMF staff preferred path): 0.4, 1.2, 1.7, 2.0, 2.0 (implicitly 2022–2026 sequence). ### Public investment management (PIM), PPPs, and fiscal risks - Rapid increase in PPPs: - PPPs expected to reach 50 percent of GDP in 2021, up from 33 percent in 2018. - Outstanding PIM challenges: - Lack of transparency on cost and schedule overruns; noncompliance with selection and approval processes; use of PPPs to circumvent medium‑term budgetary ceilings. - Recommendations: - Address outstanding 2016 PIMA recommendations. - Strengthen MOFE capacity to act as gatekeeper in project selection, evaluation, and monitoring. - Align processes for PPPs and budget‑funded projects before scaling up public investment. - Fiscal risks and transparency: - Lack of clear data on government exposure to PPPs and contingent liabilities; state guarantees under discussion. - Implement transparency and accountability measures for emergency spending; integrate earthquake reconstruction funds into the budget and subject them to PFM controls. - Publish public procurement contracts for pandemic and earthquake recovery spending and beneficial owners. ### Monetary policy, exchange rate, and external sector - Exchange rate policy: - Exchange rate flexibility should continue to serve as a shock absorber. - FX interventions reserved for disorderly market conditions and mitigating large depreciations; modest pre‑announced FX purchases acceptable. - Continued de‑euroization is important; FX‑denominated credit and deposits account for around half of the total. - External developments and reserves: - Current account deficit widened to 8.8 percent of GDP in 2020; expected to decline marginally in 2021 with tourism recovery. - Gross international reserves (billions of Euros): 3.0 (2017), 3.4 (2018), 3.4 (2019), 3.9 (2020), 4.3 (2021), 4.1 (2022), 4.2 (2023), 4.4 (2024), 4.3 (2025), 4.6 (2026). - Gross external debt (percent of GDP): 68.8 (2017), 65.1 (2018), 60.0 (2019), 65.5 (2020), 68.8 (2021), 64.3 (2022), 62.9 (2023), 61.4 (2024), 57.5 (2025), 55.8 (2026). - NIIP was -57 percent of GDP at end‑2020. - External position assessment (2020): - Adjusted CA: -7.5 percent of GDP; CA Norm (adjusted): -6.3 percent of GDP; CA Gap: -1.2 percent of GDP. - REER overvaluation estimates: 4.6 percent (CA model) and 19.5 percent (REER model). - External financing needs: 21 percent of GDP in 2020. - Gross FX reserves end‑2020: 30 percent of GDP and 188 percent of ARA (including banks’ FX deposits); excluding banks’ FX reserves: 26 percent of GDP and 160 percent of ARA. ### Financial sector resilience, NPLs, and supervisory recommendations - Key banking system indicators (Dec‑2018, Dec‑2019, Dec‑2020, Sep‑2021 selected series) - Regulatory capital to risk‑weighted assets: 18.3, 18.3, 18.3, 18.3. - Tier 1 capital to risk‑weighted assets: 17.0, 17.1, 17.2, 17.2. - Net NPLs to regulatory capital: 15.5, 13.6, 11.3, 7.8. - Gross NPLs to total loans: 11.1, 8.4, 8.1, 6.5. - ROE (annual): 13.0, 13.5, 10.7, 12.8. - Liquid assets to total assets: 34.2, 35.7, 34.8, 33.4. - Private sector credit growth: -0.9, 6.1, 8.9, 8.3. - Bank deposits growth: -1.3, 3.9, 8.3, 9.9. - Projected and stress outcomes for NPLs: - Staff regression forecasts suggest NPLs could double on average, reaching 21 percent of total loans for some banks depending on initial NPLs. - IMF staff estimate the pandemic could raise NPLs to 15 percent of total loans in Albania. - Under the adverse scenario (Annex IV), average NPL ratio could reach 17 percent by 2023. - Exchange rate effects on NPLs (elasticities): - In lek depreciation periods, 1% change of exchange rate leads to 5.8% increase of NPL in FX and 11.9% increase of NPL in lek. - In lek appreciation periods, 1% change leads to 4.8% decrease of NPL in FX and 11.5% decrease of NPL in lek. - Supervisory and policy recommendations: - Maintain vigilance; close monitoring of loan portfolio quality and timely management of problem assets. - Enhanced on‑site and off‑site supervision for more vulnerable banks. - Adopt credible capital restoration plans where shortfalls emerge; preserve capital buffers until pandemic impact known. - Strengthen resolution frameworks (including the Tirana approach for large borrowers with exposures to multiple banks) and implement insolvency and out‑of‑court restructuring frameworks. - Improve fit‑and‑proper and beneficial owner checks for significant shareholders and controllers. ### Non‑bank financial sector, virtual assets, and real estate - Non‑bank sector: - Investment funds assets under management equivalent to 4 percent of GDP. - Albania enacted legislation on virtual assets; AFSA supervision capacity should be strengthened to avoid AML/CFT vulnerabilities. - Real estate: - Housing price growth averaged 11 percent annually since 2018. - Mortgages account for 64 percent of household loans; construction loans 13 percent of enterprise loans. - Staff encourages addressing data gaps and developing surveillance indicators. ### Social protection, tourism, and minimum wage - Social protection: - Poverty rate among highest in Western Balkans; poverty headcount estimated to have increased by 0.8 percentage point after earthquake and pandemic. - Authorities expanded social protection programs by about 1 percent of GDP in 2020–21. - Recommendations: increase coverage, better targeting, reduce exclusion errors; requires raising tax revenues and social insurance contributions by raising labor force participation and reducing informality. - Tourism: - Total contribution of tourism and related activities peaked at 18 percent of GDP in 2019; direct contribution 7.6 percent of GDP. - 2020 international arrivals dropped by 59 percent; tourism contribution to GDP fell to 10.4 percent in 2020. - Staff baseline: return to 2019 level of tourist flows by 2023; 2021 arrivals projected between 70 percent (baseline) and 80 percent (fastest vaccination) of 2019 levels; January–September 2021 arrivals at 89 percent of 2019 level. - Short‑term support for tourism should be temporary, well‑targeted, and subject to checks on business viability; broad tax incentives should be revisited under MTRS. - Minimum wage (Box 3 selected facts): - Minimum wage increased from 26,000 lek to 30,000 lek on January 1st, 2021 (15.4 percent increase). - Government announced intention to raise it further to 40,000 lek over the next four years. - Current minimum wage equals 64 percent of median gross earnings. - About 110,000 individuals benefited from the recent increase, corresponding to 4.6 percent of population older than 15 years. - Informal workers represent 30.3 percent of the labor force. - Staff conclusions: increases should be in line with productivity evolution and complemented by measures to reduce informality. ### Debt sustainability, stress tests, and adverse scenario (selected figures) - Post Financing Assessment: - Fund credit outstanding: 279.2 percent of quota (3.5 percent of GDP or 11.7 percent of gross international reserves) at end‑2020; 247.3 percent of quota at end‑2021; expected to remain above 200 percent of quota until February 2023. - Debt service to the Fund projected to peak in 2024 at 0.8 percent of GDP and 3.1 percent of reserves. - Public DSA baseline and alternative assumptions (selected) - Baseline real GDP growth: 7.8 (2021); 3.8 (2022); 3.6 (2023); 3.5 (2024); 3.5 (2025); 3.4 (2026). - Baseline effective interest rate: 1.9 (2021); 3.7 (2022); 3.9 (2023); 4.3 (2024); 4.7 (2025); 5.1 (2026). - Primary balance (Baseline): -4.5 (2021); -3.2 (2022); -1.5 (2023); 0.0 (2024–2026). - Adverse scenario (Annex IV) selected impacts (Percent of GDP or stated units) - Real GDP growth (Adverse): 7.8 (2021); 0.5 (2022); 1.5 (2023). - Public debt (Adverse): 80.6 (2021); 85.0 (2022); 89.1 (2023). - Reserves (million Euro, Adverse): 4,306 (2021); 3,576 (2022); 3,096 (2023). - Reserves as percent of ARA EM Metric (Adverse): 176 (2021); 148 (2022); 127 (2023). - Fiscal balance (Adverse): -6.8 (2021); -6.9 (2022); -5.7 (2023). - Primary balance (Adverse): -4.5 (2021); -4.7 (2022); -3.2 (2023). - BOP financing gap (Adverse scenario): 0.0 (2021); 0.5 (2022); 1.0 (2023). - Stress‑test diagnostics: - Bond spread (24‑Jul‑21 through 22‑Oct‑21 average): 254 bp. - External Financing Requirement (2020): 12 percent of GDP. - Public debt in foreign currency (2020): 48 percent of total. - Public debt held by non‑residents (2020): 44 percent of total. - Staff view: - Public finances sustainable but high; GFNs projected to average 21 percent of GDP annually; half of domestic public debt has short maturity. - Reserves and flexible exchange rate are key mitigants; access to development partners and captive domestic market help mitigate rollover risks. ### Staff appraisal — consolidated policy recommendations - Fiscal: - Pivot fiscal policy to rebuild buffers, reduce debt, meet development needs—anchored on revenue mobilization via a sound MTRS. - Implement a credible revenue‑based medium‑term adjustment plan starting 2022 to achieve a primary surplus of 1½ percent of GDP in 2024. - Reduce non‑priority spending; better target support to the most vulnerable; avoid broad subsidies. - Strengthen PIM and PPP oversight; align PPPs with budget processes and manage contingent liabilities. - Improve transparency and PFM controls for emergency and reconstruction spending. - Monetary and financial sector: - Maintain accommodative monetary policy as fiscal support is pared back; tighten only if broadening, persistent inflationary pressures occur. - Preserve exchange rate flexibility; use FX interventions sparingly. - Maintain vigilance over banking sector; enhance supervision, preserve capital buffers, and strengthen resolution frameworks. - Enhance real estate market surveillance. - Structural: - Continue judicial reform and anticorruption efforts; strengthen AML/CFT to exit FATF grey‑list. - Improve business environment, productivity, and public investment efficiency. - Social and sectoral: - Increase social protection coverage with better targeting funded by higher revenues and contributions. - Tourism strategy: temporary targeted support, then shift to sustainable year‑round tourism with quality and environmental priorities. - Concluding assessment: - Albania’s capacity to repay the Fund is assessed as adequate; risks contained and manageable but public finances remain the key vulnerability requiring policy action. *Source: IMF staff report (selected excerpts) — content unit 1albea2021001.* ### 1. Review of Tax Policy Proposals of the Albanian Draft MTRS ___________________________________ 11 ### 1. Review of Tax Policy Proposals of the Albanian Draft MTRS ### Context - Albania experienced the COVID-19 pandemic after its strongest earthquake in decades. - Vaccination and epidemiology: - Mass vaccination started on April 2021. - Only one-third of the population is fully vaccinated. - About 80 percent of the available 2.5 million doses have been administered. - Political and reform context: - The Socialist Party won a third consecutive mandate; government priorities include recovery, reconstruction, and EU-related reforms (including judicial reforms). - Implementation of past Fund advice has been uneven; interest exists in developing a Medium-Term Revenue Strategy (MTRS) but tax policy reform progress has been delayed by shocks. - Structural weaknesses noted: - Weak public investment management and limited progress on SOE governance, anti-corruption, and institutional reforms. - Banking supervision aligned more closely with Basel standards, but NPL resolution is hampered by judicial reform delays. ### Recent Developments — Key Findings - Macroeconomic performance in 2020: - Real GDP contracted by 4 percent in 2020, driven by a large drop in services. - Almost 45,000 jobs were lost. - Fiscal deficit widened to 6.8 percent of GDP. - Public debt increased to 77.2 percent of GDP. - Reserves increased to €3.9 billion at year-end (188 percent of ARA metric), supported by the Rapid Financing Instrument (RFI) and a Eurobond issuance. - 2021 recovery and conditions: - The economy is rebounding strongly in 2021; recovery broad-based with all sectors but agriculture registering positive growth in 2021H1. - Electricity production doubled in 2021Q1 compared to 2020Q1 due to favorable weather conditions. - January–September tourist arrivals reached 89 percent of the 2019 level, with source markets shifting regionally. - Labor market: participation and employment rates remained 1 percentage point below pre-pandemic levels; unemployment was 0.7 percentage point higher. - Headline inflation has risen due to food and energy, but core inflation increased only modestly. - Average wages grew by more than inflation in 2021Q2, partly due to an increase in the minimum wage in January 2021. - Monetary policy: the Bank of Albania’s policy rate has been maintained at 0.5 percent since March 2020; the BoA extended unlimited liquidity provision to banks through end-2021 and expects to discontinue it in 2022Q1. - Fiscal developments in 2021: - Fiscal policy in 2021 is more expansionary than warranted, with increased domestically financed public investment (non-earthquake) exceeding COVID-19 targeted support. - The fourth 2021 budget revision (July) increased the 2021 deficit by 0.7 percent of GDP. - Staff projects a primary deficit of about 4½ percent of GDP in 2021. - General government debt projected to rise to slightly above 80 percent of GDP at end-2021. - A €700 million Eurobond issuance is planned before end-2021 to help meet 2021–2022 financing needs. - External sector: - The current account deficit widened considerably in 2020; expected to decline marginally in 2021 with tourism recovery and subdued service imports. - The BoA resumed FX reserve purchases; expected year-end reserves projected toward €4.3 billion (176 percent of ARA metric). ### Outlook and Risks - Staff baseline projections: - Real GDP growth projected at 7.8 percent in 2021. - Growth expected to converge to potential of 3.4 percent over the medium run. - Inflation projected to settle at the BoA’s 3 percent target over the medium run. - Fiscal outlook and public debt: - Staff’s baseline projects very limited consolidation in 2022; primary deficit about 3.2 percent of GDP in 2022 using realistic revenue assumptions (higher than the Budget’s 2.7 percent forecast). - Beyond 2022, staff projects the primary deficit to decline gradually to a zero balance by 2024 per the Organic Budget Law (OBL). - This implies a backloaded consolidation of about 2⅓ percent of GDP over three years. - Without additional adjustment, public debt will hover above 70 percent of GDP in the medium term; government gross financing needs remain about 21 percent of GDP annually. - Risks (downside and upside): - Major downside risks: emergence of vaccine-resistant variants or localized outbreaks; higher global energy prices; tighter global financial conditions and de-anchoring of inflation expectations; exchange rate exposure from sizeable external debt and unhedged FX loans. - Mitigating factors: large reserve coverage. - Upside: faster normalization from the pandemic. ### Policy Discussions — Fiscal Policy and Recommendations - General policy stance: - With the recovery firming up, fiscal policy should pivot to rebuilding buffers, reduce debt, and meet development needs—this hinges on raising revenue. - Fiscal support should be better targeted to those most in need. - As fiscal support is pared back, monetary policy should remain accommodative while inflationary pressures are contained. - Financial sector risks should be monitored; structural reforms should be advanced. - Staff fiscal recommendations and numerical targets: - Staff recommends a revenue-based medium-term adjustment to: - Achieve a primary deficit of about 2.4 percent of GDP in 2022. - Reach a primary surplus of 1½ percent of GDP in 2024. - This implies: - A total structural adjustment of about 3.8 percent of GDP over three years. - Meaningful consolidation starting in 2022 of about 1 percent of GDP to strengthen credibility. - Policy measures recommended for 2022: - Remove tax loopholes and exemptions. - Reduce non-priority, low-efficiency spending and non-targeted support. - Save windfall revenues to accelerate deficit and debt reduction. - Expected outcomes under the recommended path: - General government debt could be brought back to below the pre-pandemic level by 2026, assuming no new shocks. - If the recovery weakens, higher targeted support should be deployed conditional on financing availability. - Areas of concern to monitor: - Visibility over implicit liabilities from PPPs and other investment support schemes remains limited. - Execution risks from optimistic revenue projections and elevated spending pressures in the 2022 Budget. *Source: IMF staff report (selected excerpts).* ### 13. The lynchpin of a credible fiscal adjustment must be a sound MTRS to broaden the ### 13. The lynchpin of a credible fiscal adjustment must be a sound MTRS to broaden the ### Medium-Term Revenue Strategy (MTRS): expected impact and design - If fully operationalized, a sound MTRS in line with Fund recommendations can be expected to help boost revenues by 2.3 percent of GDP over four years. - Staff assumes a revenue gain of 0.3 percent of GDP in the baseline based on measures already taken to improve revenue administration (e.g., fiscalization). - The MTRS should: - Be the blueprint of Albania’s tax reforms in the medium term (replace piecemeal approach). - Have a clear point target for revenue gains (not a wide range) and yearly revenue targets showing distribution over the life-cycle of the MTRS. - Indicate for each tax policy reform its objective, justification, timing, and expected revenue impact. - Be accompanied by an Action Plan showing sequential steps to achieve revenue targets. - Avoid tax amnesty and ad hoc tax cuts, exemptions, and incentives. - Institutional recommendation: - Create a dedicated tax policy unit with adequate resourcing and staffing in the Ministry of Finance and Economy (MOFE). - Strong political leadership and broad stakeholder support are crucial. ### Findings from the IMF review of the draft MTRS and 2022 Fiscal Package (Box 1) - Positive and negative past measures: - Tax deferrals after the pandemic provided timely and temporary relief without eroding the tax base. - Increasing the non-taxable CIT threshold to exclude businesses with annual turnover up to Lek 14 million—coupled with a reduced dividend withholding tax—creates a loophole enabling high-income individuals to avoid taxes via incorporation and weakens the PIT system. - Larger tax rate differential between businesses below and above the threshold increases incentive to underreport and/or split companies. - Recommendations: - Reduce the turnover threshold and establish an appropriate regime for SMEs. - Establish a single registration threshold for VAT and the income tax; define SMEs as those with turnover below this threshold regardless of corporate structure. - Design a simplified tax regime to treat equivalently taxpayers of the simplified and normal regime. - Reconsider the design of personal income tax brackets in the 2022 Fiscal Package to avoid marginal effective tax rates spikes. - Close the current gap between the stated MTRS revenue goal and the sum of revenue impacts of individual reforms by including additional revenue‑augmenting reforms. - Consider improving Albania’s taxation options in the digital age. - Assessment of the draft MTRS: - The current MTRS draft is estimated to leave a gap of ¾ percent of GDP to meet the lower bound of the authorities’ revenue objective of 1 percent of GDP from tax policy reforms. - If IMF’s 2019 MTRS tax policy recommendations were considered in full, revenue gains could be at least 1.3 percent of GDP. - 2022 Fiscal Package: - Some measures align with 2019 IMF recommendations: removing some exemptions (for fuel supplied in free-zones), removing preferential CIT rates (for software businesses), indexing excises with inflation, partially reducing differentials between excises for beer and wine. - Some measures are problematic: introducing a second reduced VAT rate and the proposed PIT structure that creates two marginal effective rate spikes. ### Fiscal consolidation and medium-term fiscal paths (Text Table 3 — selected figures) - Tax revenues (Percent of GDP) - IMF staff baseline: 25.6 (2018), 25.2 (2019), 24.6 (2020), 25.6 (2021), 25.8 (2022), 25.8 (2023), 25.8 (2024), 25.8 (2025), 25.8 (2026) - IMF staff preferred path: 25.6 (2018), 25.2 (2019), 24.6 (2020), 25.6 (2021), 26.2 (2022), 27.0 (2023), 27.5 (2024), 27.8 (2025), 27.8 (2026) - MTBF*: 25.6 (2018), 25.2 (2019), 24.6 (2020), 25.9 (2021), 26.8 (2022), 27.1 (2023), 27.3 (2024), 27.5 (2025), 27.7 (2026) - Primary expenditure (excluding interest) (Percent of GDP) - IMF staff baseline: 26.6 (2018), 27.2 (2019), 31.0 (2020), 31.9 (2021), 30.8 (2022), 29.0 (2023), 27.6 (2024), 27.6 (2025), 27.5 (2026) - IMF staff preferred path: 26.6 (2018), 27.2 (2019), 31.0 (2020), 31.9 (2021), 30.4 (2022), 28.7 (2023), 27.8 (2024), 28.2 (2025), 28.5 (2026) - MTBF*: 26.6 (2018), 27.2 (2019), 31.0 (2020), 32.8 (2021), 31.4 (2022), 29.0 (2023), 28.7 (2024), 28.7 (2025), 28.2 (2026) - Overall balance (Percent of GDP) - IMF staff baseline: -1.3 (2018), -2.0 (2019), -6.8 (2020), -6.8 (2021), -5.4 (2022), -3.7 (2023), -2.3 (2024), -2.3 (2025), -2.4 (2026) - IMF staff preferred path: -1.3 (2018), -2.0 (2019), -6.8 (2020), -6.8 (2021), -4.6 (2022), -2.2 (2023), -0.8 (2024), -0.9 (2025), -1.4 (2026) - MTBF*: -1.3 (2018), -2.0 (2019), -6.8 (2020), -6.8 (2021), -5.4 (2022), -2.9 (2023), -2.8 (2024), -2.8 (2025), -2.3 (2026) - Primary balance (Percent of GDP) - IMF staff baseline: 0.9 (2018), 0.1 (2019), -4.7 (2020), -4.5 (2021), -3.2 (2022), -1.5 (2023), 0.0 (2024), 0.0 (2025), 0.0 (2026) - IMF staff preferred path: 0.9 (2018), 0.1 (2019), -4.7 (2020), -4.5 (2021), -2.4 (2022), 0.0 (2023), 1.5 (2024), 1.4 (2025), 1.0 (2026) - MTBF*: 0.9 (2018), 0.1 (2019), -4.7 (2020), -4.6 (2021), -2.7 (2022), 0.0 (2023), 0.3 (2024), 0.4 (2025), 1.1 (2026) - Structural primary balance (Percent of GDP) - IMF staff baseline: 0.9 (2018), 0.6 (2019), -2.8 (2020), -2.3 (2021), -2.1 (2022), -1.5 (2023), 0.0 (2024), 0.0 (2025), 0.0 (2026) - IMF staff preferred path: 0.9 (2018), 0.6 (2019), -2.8 (2020), -2.3 (2021), -1.3 (2022), 0.0 (2023), 1.5 (2024), 1.4 (2025), 1.0 (2026) - Public debt (Percent of GDP) - IMF staff baseline: 69.5 (2018), 67.3 (2019), 77.2 (2020), 80.6 (2021), 79.0 (2022), 78.6 (2023), 77.6 (2024), 75.5 (2025), 74.1 (2026) - IMF staff preferred path: 69.5 (2018), 67.3 (2019), 77.2 (2020), 80.6 (2021), 78.0 (2022), 76.1 (2023), 73.4 (2024), 69.3 (2025), 66.2 (2026) - MTBF*1/: 67.7 (2018), 66.3 (2019), 76.1 (2020), 80.6 (2021), 79.4 (2022), 78.3 (2023), 76.6 (2024), 75.4 (2025), 74.2 (2026) - Memorandum items (Revenue gains and expenditure changes under IMF staff preferred path) - Revenue gains under IMF staff preferred path: 0.4, 1.2, 1.7, 2.0, 2.0 - Expenditure changes under IMF staff preferred path: -0.4, -0.3, 0.2, 0.6, 1.0 - Real GDP growth (percent) - Baseline: 4.0 (2018), 2.1 (2019), -4.0 (2020), 7.8 (2021), 3.8 (2022), 3.6 (2023), 3.5 (2024), 3.5 (2025), 3.4 (2026) - Reform path: 4.0 (2018), 2.1 (2019), -4.0 (2020), 7.8 (2021), 3.6 (2022), 3.2 (2023), 3.5 (2024), 4.2 (2025), 4.5 (2026) ### Spending prioritization and social support - Recommendations on spending: - Reduce non-priority spending, including broad subsidies and overly ambitious domestically financed (non-earthquake) public investment given weak capacity and low efficiency. - Use part of the fiscal room created to provide higher targeted support to the most vulnerable (such as low-income households) to ensure an inclusive recovery, given Albania’s relatively high poverty rate. - Beyond 2024: - After governance and efficiency of public spending have been strengthened and fiscal risks controlled (¶15-18), a lower primary surplus of about 1 percent of GDP could be considered for 2026. - This should first support spending on human development needs and second address infrastructure needs. ### Public investment management (PIM) and PPPs - Rapid increase in PPPs: - PPPs expected to reach 50 percent of GDP in 2021, up from 33 percent in 2018. - Domestically financed (non-earthquake) public investment has grown markedly since 2020. - Outstanding PIM challenges: - Lack of transparency on cost and schedule overruns. - Noncompliance with established selection and approval processes. - Use of PPPs to circumvent medium-term budgetary ceilings. - Recommendations: - Address outstanding 2016 PIMA recommendations. - Strengthen MOFE capacity to act proactively as gatekeeper in project selection and to engage in evaluation and monitoring. - Align processes for PPPs and budget-funded projects before scaling up public investment. ### Fiscal risks, transparency, cash and debt management - Fiscal risks have risen; key challenges: - Lack of clear data on government exposure, especially to PPPs. - Government guarantee schemes under discussion and increasing reliance of state-owned enterprises on sovereign guarantees and intermittent budget support. - Court decisions can have large fiscal costs and should be identified and monitored as contingent liabilities. - Sectoral reforms: - Reinvigorate electricity and related water sector reforms to reduce fiscal risks and climate-related vulnerabilities. - Transparency and PFM: - Implement transparency and accountability measures for emergency spending as soon as possible. - Integrate earthquake reconstruction funds into the budget process and subject them to adequate PFM controls. - Publish public procurement contracts for pandemic and earthquake recovery spending, names of awarded companies, and their beneficial owners; address deficiencies identified in the SAI’s audit. - Progress noted: ongoing implementation of a public registry of beneficial owners; SAI published audit of earthquake and pandemic-related spending. - Cash and debt management: - Albania has large refinancing needs, shallow domestic markets, a sizeable share of external commercial debt with large bullet repayments, and sizeable domestic arrears. - Need for a robust debt management strategy to guide decisions on external commercial borrowing (subject to rollover and exchange rate risks). - MOFE improved cash forecasting capacities and reduced forecasting errors. - Limited progress on framework with the BoA to expand cash management toolbox for dealing with foreign currencies. - Improved arrears reporting system operationalized; stock of VAT refund arrears reduced further and expected to be cleared by end-2021. ### Authorities’ views (summary) - Authorities reaffirm commitment to fiscal consolidation to rebuild buffers but consider a more gradual adjustment than staff recommends. - Key points from authorities: - Pace of consolidation to start slow given elevated 2022 spending pressures and rising energy prices. - Commitment to abide by fiscal rules from 2022 and to achieving a primary balance of at least zero from 2024 onwards. - Will stop use of normative acts for in-year budget revisions from 2022 and subject any changes to the design and application of the OBL to normal parliamentary approval. - Envisage timely implementation of a sound MTRS, aiming to raise additional revenue of 2.3-3 percent of GDP over four years. - Will scale back overly ambitious domestically financed (non-earthquake) capital expenditure but continue ongoing infrastructure projects. - Committed to strengthening PIM (including PPPs) and closer monitoring and management of rising fiscal risks. - Noted publication of an annual PPP monitoring report since 2019 and periodic MOFE reporting on budget payments to PPPs and overall support relative to the 5 percent of tax revenue legal limit. - Plan to pass a law to channel the 2021 SDR allocation to the budget and hold it for contingency. - SAI to continue auditing crisis-related spending in 2021. ### Social protection (Box 2) - Albania’s social indicators: - Poverty rate is one of the highest in the Western Balkans. - Poverty headcount estimated to have increased by 0.8 percentage point in the aftermath of the earthquake and pandemic. - World Bank estimates a decline in the poverty rate to below pre-pandemic levels in 2021 due to strong rebound and government support measures. - Social protection coverage is among the lowest in the region. - Pandemic response: - Authorities temporarily expanded existing social protection programs by about 1 percent of GDP in 2020-21. - Measures included temporarily higher social assistance benefits, extended unemployment insurance, and wage subsidies for formal workers, unpaid family business members, and informal workers if they formalize. - Recommendations to strengthen social protection: - Increase coverage of social protection programs, which requires raising tax revenues and increasing social insurance contributions by raising labor force participation and reducing informality. - Enhance design of social protection system to better target and increase coverage, reduce exclusion errors, and correct beneficiary information inaccuracies. *Source: IMF Staff estimates and projections (from the provided content).* ### 22. Exchange rate flexibility has served Albania well and should continue to perform its ### 22. Exchange rate flexibility has served Albania well and should continue to perform its role as a shock absorber ### Exchange rate policy and monetary stance - Exchange rate flexibility should continue to serve as a shock absorber. - Foreign exchange interventions: - Should be reserved for disorderly market conditions and mitigating the adverse effects of large depreciations on balance sheets. - Can be used for modest pre-announced foreign exchange purchases. - In case of heightened balance of payments (BoP) pressures and financial stability concerns—including in the context of tighter global financial conditions—the authorities should stand ready to take further measures as needed to preserve stability. - Continued progress in de-euroization is key to improving the effectiveness of monetary policy: - Growth in local currency deposits and loans in 2021 has, on average, outpaced those in foreign currency. - Foreign currency-denominated credit and deposits account for around half of the total. - Continued macroeconomic stability will remain key to further progress in de-euroization. Authorities’ views - The BoA views monetary policy as needing to remain accommodative to support the economic rebound and facilitate fiscal consolidation. - They expect the current rise in headline inflation, driven by global commodity prices, to subside by the second half of 2022 and consider inflationary pressures well contained. - The BoA will monitor inflation and adjust policy to maintain price stability. - The BoA sees strong growth in local currency credit relative to foreign currency loans as evidence of the effectiveness of de-euroization measures. ### Financial sector — resilience and risks Findings on system performance and indicators (selected figures as reported) - Regulatory capital to risk-weighted assets: 18.3, 18.3, 18.3, 18.3 (Dec.-2018, Dec.-2019, Dec.-2020, Sept.-2021). - Tier 1 capital to risk-weighted assets: 17.0, 17.1, 17.2, 17.2. - Shareholders' equity as a percent of total assets: 10.1, 10.5, 10.4, 10.0. - Net NPLs to regulatory capital: 15.5, 13.6, 11.3, 7.8. - Gross NPLs to total loans: 11.1, 8.4, 8.1, 6.5. - ROE (annual basis): 13.0, 13.5, 10.7, 12.8. - ROA (annual basis): 1.3, 1.4, 1.1, 1.3. - Net open FX position to regulatory capital: 7.8, 7.4, 8.4, 7.7. - Net open FX position to Tier 1 capital: 8.4, 8.0, 9.0, 8.2. - Liquid assets to total assets: 34.2, 35.7, 34.8, 33.4. - Liquid assets to short-term liabilities (<1Y): 46.2, 49.4, 47.4, 45.9. - Private sector credit growth: -0.9, 6.1, 8.9, 8.3. - Bank deposits growth: -1.3, 3.9, 8.3, 9.9. - Note: the latest available data of credit and deposit growth is from August 2021. Key findings and near-term risks - The financial system has shown resilience; credit flows continued to support the economy with deposit and credit growth driven by household mortgages and the construction sector. - The banking system’s average capital adequacy ratio declined marginally in 2021H1 but remains well above regulatory requirements, though a few banks’ ratios are only marginally above the requirements. - The NPL ratio reached its lowest level in 13 years in September but remains above the level of regional peers. - Loan moratoria and temporary relaxation of loan classification and provisioning rules have ended without discernible adverse effects so far; however: - About 30 percent of total bank loans were restructured in March–December 2020. - 7 percent of these restructured loans were already non-performing prior to the pandemic. - Staff analysis suggests the NPL ratio could peak at 15 percent due to the impact of the pandemic. - If NPLs remain contained next year, a focused asset quality review by the BoA could be considered to accurately assess the pandemic’s impact on banks’ asset quality and capital position. Recommendations for bank supervision, resolution, and capital - Maintain continued vigilance for early detection of vulnerabilities; close monitoring of loan portfolio quality and timely identification and management of problem assets are crucial. - Enhanced on-site and off-site supervision for more vulnerable banks. - Where capital shortfalls emerge: - Adopt a credible capital restoration plan. - Capital could be allowed to temporarily fall below prudential limits. - Preserve banks’ capital buffers until the pandemic’s full impact on asset quality is known: - The suspension of bank dividend distribution lapsed at end-2020. - The BoA restricted banks from distributing the profit of 2020-21 until end-2021. - If the restriction for the 2020 profit is not extended beyond 2021, the BoA should engage in supervisory dialogues and allow distribution on a case-by-case basis, subject to rigorous assessment and stress testing. - Banks that have not met the increased macroprudential capital buffer requirement should retain profits to build buffers. - Strengthen resolution frameworks: - Implement more extensively the regulatory framework for dealing with large borrowers with NPLs with more than one bank (Tirana approach). - Swiftly implement insolvency and resolution frameworks already in force, including out-of-court loan restructuring. - Resolve the impasse between the Bailiff Chamber and banks on regular asset recovery and tariff structure. ### Supervisory framework and banking structure risks - The changing landscape with more banks having significant shareholding by individuals and non-financial groups raises risks of capital shortfalls, related-party transactions, and growing large exposures. - Authorities should continue to improve and implement licensing and supervisory frameworks to ensure fit and proper status of significant shareholders and controllers, beneficial owners, and senior managers. - The BoA should continue efforts to align the banking regulatory framework with international standards. ### Non-bank financial sector and virtual assets - Non-bank financial sector is relatively small but growing; investment funds with assets under management equivalent to 4 percent of GDP represent the largest share of non-bank activities. - Albania enacted legislation on virtual assets and related activities; virtual asset activity is currently limited but the new regulatory framework could increase demand. - Risks include AML/CFT vulnerabilities if the Albanian Financial Supervisory Authority (AFSA) lacks sufficient resources, expertise, or capacity to enforce regulation. Recommendations - AFSA should strengthen monitoring of the virtual asset ecosystem, communication with investors, and enforcement of the framework. - Collaboration with international regulatory authorities will be important given the lack of comprehensive international regulatory frameworks (except the FATF standard for AML/CFT). ### Real estate market surveillance - Housing price growth has averaged 11 percent annually since 2018, driven by prices in Tirana and coastal areas. - Mortgages account for 64 percent of household loans; construction loans account for 13 percent of total loans to enterprises. - Staff encourages authorities to address data gaps in the real estate market and develop indicators to closely monitor potential impacts on financial stability. BoA and AFSA views - The BoA highlights banking system stability and resilience and is committed to monitoring pandemic effects, identifying problems early, and taking corrective measures. - The BoA is pursuing equivalence with EU supervisory and regulatory standards, developing a taxonomy of risk indicators for bank lending related to the real estate sector, and expects to publish a guideline for banks in 2022. - AFSA noted that under the law on virtual assets, only licensed entities in Albania will be subject to their supervision. ### Governance, institutions, and competitiveness Findings on reforms and constraints - Judicial reform launched in 2016 with EU support is progressing; more than half of judges have been vetted. - The High Court and the Constitutional Court now have sufficient quorum to convene. - SPAK (Specialized Structure for Anti-Corruption and Organized Crime), comprising the SPO and NBI, is operational with improved capacity and notable prosecutions. - Key priorities: ensure sufficient trained judges and prosecutors and streamline the court system to improve independence, professionalism, and efficiency. - Corruption remains a key impediment to growth despite progress; anti-corruption strategy implementation continues albeit slowly. - A mid-term review of the national anticorruption and intersectoral strategy has been completed; work is underway on an updated strategy and action plan. - Authorities should continue to work with development partners to increase transparency and accountability of public spending. AML/CFT status and actions - In February 2021, the FATF placed Albania under increased monitoring (“grey-list”) owing to concerns about its AML/CFT framework and effectiveness; an action plan was agreed. - MONEYVAL enhanced follow-up noted some progress but more work is needed to attain full technical compliance. - Efforts are underway to exit the grey-list, including aligning national AML/CFT legislation with EU Directives and revisiting virtual assets law in light of updated FATF standards. - A beneficial ownership register is being put in place, but beneficial owners of dormant companies have yet to be identified. - Authorities should improve supervision of real estate agents given high ML/TF risks in this sector. Structural competitiveness gaps - Albania’s business and investment environment is constrained by weak institutional framework, corruption vulnerabilities, shortages of skilled labor, and infrastructure gaps. - These factors contribute to a productivity gap reflected in lagging GDP per capita and comparatively low wages. - Further minimum wage increases should be accompanied by measures to reduce informality and increase productivity. - Persistent shortfalls in the quality of infrastructure despite above-average public investment underscore the need to strengthen the efficiency and quality of public investment. - Energy and water sector reforms are crucial given hydropower is the sole source of electricity and heat production. Authorities’ views - Authorities broadly concur with staff on the need to address structural impediments, reaffirm commitment to judicial reform and anticorruption agenda. - Asset declaration platform is in final stages for operationalization with plans to make information publicly available. - Authorities noted existing laws address some MONEYVAL concerns on virtual assets and highlighted the role of the Albania Investment Development Agency in fostering a business-friendly environment. ### Box 3 — The Minimum Wage in Albania (selected facts and considerations) - The government increased the minimum wage from 26,000 lek to 30,000 lek on January 1st, 2021 and announced intention to raise it further to 40,000 lek over the next four years. - The recent increase was by 15.4 percent. - The current minimum wage is equivalent to 64 percent of the median gross earnings. - About 110,000 individuals benefited from the recent increase of the minimum wage, corresponding to 4.6 percent of population older than15 years. - Informal workers represent 30.3 percent of the labor force. - Key considerations for minimum wage policy: - Balance alleviating in-work poverty and income inequality with economic factors to avoid adverse effects on firm productivity, competitiveness, and employment. - Increases should be in line with productivity evolution. - High informality limits the impact of minimum wage increases on the most vulnerable workers and past increases have coincided with a rise in informality. *International Monetary Fund — selected section from the Albania country report chapter titled “Exchange rate flexibility has served Albania well and should continue to perform its role as a shock absorber.”* ### Box 3. The Minimum Wage in Albania (concluded) ### Box 3. The Minimum Wage in Albania (concluded) ### Minimum wage findings and implications - Lines in the referenced chart represent the share of the total number of salaries distributed across different wage brackets. - For each increase in the minimum wage, the number of salaries paid in the bracket incorporating the former minimum wage drops in favor of the bracket including the new minimum wage. - In the three increases of minimum wage reported in the chart, the number of salaries paid at the minimum wage before the introduction of a new minimum wage is found to be lower than after; this could be attributed to an increase in informality. - Key analytical conclusions: - An increase in the minimum wage must be complemented by effective measures to reduce informality and improve productivity. - Albania’s minimum wage is low and a further increase to 40,000 lek is likely to affect competitiveness only marginally. - A further increase in the minimum wage must be accompanied by decisive measures to reduce informality, as high informality limits the benefits of the minimum wage on the most vulnerable workers. - It is crucial for the minimum wage increase to be in line with productivity growth to avoid economic distortions. ### Post Financing Assessment — capacity to repay and risks - Fund credit outstanding was 279.2 percent of quota (3.5 percent of GDP or 11.7 percent of gross international reserves) at end-2020 and will amount to 247.3 percent of quota at end-2021. - Expected to remain above 200 percent of quota—the threshold for a PFA—until February 2023. - Debt service to the Fund is projected to peak in 2024 at 0.8 percent of GDP and 3.1 percent of reserves. - Public finances: - Public debt is sustainable but the level is high and GFNs remain large. - Public debt ratio expected to decline gradually starting in 2022 but will remain considerably above pre-pandemic levels in 2026. - GFNs are projected to average 21 percent of GDP annually. - Half of total domestic public debt has short maturity; vulnerabilities stem from rollover risks and exchange rate risks due to increased foreign currency–denominated debt. - Debt burden sensitive to shocks in fiscal stance, growth, and interest rates. - Banking and external sector: - Risks from the banking system remain contained, though a potentially delayed impact of the pandemic should be monitored. - Improvements in banks’ asset quality and capital buffers before the pandemic and predominance of foreign ownership of systemically important banks partly mitigate risks. - Risk of an increase in NPLs amid persistent weaknesses in resolution frameworks could exert pressure on the banking system. - NIIP was -57 percent of GDP at end-2020. - Foreign liabilities amounted to 121 percent of GDP; over half were FDI liabilities and a quarter comprised long-term public debt. - Foreign reserves are projected to remain adequate in the medium term. - Mitigants and access: - Reserve coverage and flexible exchange rate are important shock absorbers. - Rollover risks mitigated by access to development partners’ longer-term financing and captive domestic financial market. - In February 2021, the BoA’s repo line of €400 million with the ECB has been extended to March 2022. - With a strong repayment track record, relative macroeconomic stability, high international reserves, long external debt maturity, continued ease of market access (sovereign spread has shrunk over the last year), and access to liquidity, Albania should be able to manage a range of risks to its capacity to repay. - If downside risks materialize: - Albania’s twin deficits are expected to rise, implying larger financing needs, and further policy adjustment and additional official support, including from the Fund, could be needed. ### Staff appraisal — macroeconomic outlook and policy recommendations - Recent performance and outlook: - Economy contracted by 4 percent in 2020 and is rebounding strongly by a projected 7.8 percent in 2021. - Staff projects growth to normalize to 3.8 percent in 2022. - Headline inflation has risen due to higher food and energy prices; core inflation has increased only modestly and broader inflationary pressures are subdued. - Major downside risks: emergence of vaccine-resistant variants or localized outbreaks in Albania, potentially tighter global financial conditions, and higher energy prices. - Upside risk: faster normalization from the pandemic. - Fiscal policy recommendations: - With the recovery consolidating, fiscal policy should pivot to rebuilding buffers while meeting development needs. - Implement a sound MTRS to broaden the tax base, remove loopholes, and raise revenue. - Formulate a credible revenue-based medium-term adjustment plan now and implement starting next year to achieve a meaningful fiscal adjustment in 2022 aiming for a primary surplus of 1½ percent of GDP in 2024. - Reduce non-priority spending, particularly overly ambitious domestically financed (non-earthquake) public investment given weak capacity and low efficiency. - Better target fiscal support to those most in need; avoid broad subsidies. - Strengthen quality and transparency of public spending; address shortcomings in public investment management before scaling up investment. - Strengthen PIM standards and capacity to manage the rapidly rising stock of PPPs; MOFE should build capacity to play a gatekeeper role and align processes for PPPs and budget-financed projects. - Improve monitoring and management of fiscal risks, including exposures from PPPs, contingent liabilities related to state-owned enterprises (especially the utility sector), and court decisions. - Implement transparency and accountability measures for spending under emergency procedures and integrate earthquake reconstruction funds into the budget process under adequate PFM controls. - Monetary and financial sector recommendations: - As fiscal support is pared back, monetary policy should remain accommodative. - Any shift toward monetary tightening should be based on clear indications of broadening and persistent inflationary pressures. - Exchange rate flexibility should continue to serve as a shock absorber. - Maintain vigilance over the banking system: monitor loan portfolio quality, identify and manage problem assets timely, subject more vulnerable banks to enhanced supervision, and preserve banks’ capital buffers until the pandemic’s full impact is known. - Strengthen resolution frameworks to address potential NPL increases; ensure fit-and-proper status of significant shareholders, controllers, beneficial owners, and senior managers. - Enhance surveillance of the fast-growing real estate market for potential financial stability implications. - Structural recommendations: - Continue efforts to complete comprehensive judicial reform launched in 2016. - Update and implement anticorruption strategy and action plan; strengthen AML/CFT framework and implement action plan to exit FATF’s grey-list swiftly. - Improve the business environment and productivity to close the competitiveness gap with regional peers. ### Concluding assessment - Albania’s capacity to repay the Fund is assessed as adequate and risks to it remain contained and manageable. - Public finances remain the key source of vulnerabilities; policies to reduce fiscal vulnerabilities and rebuild fiscal policy room are critical to risk mitigation. *Source: Box 3. The Minimum Wage in Albania (concluded), 1albea2021001.* ### 52. It is recommended that the next Article IV consultation be held on the standard 12- ### 1albea2021001 - 52. It is recommended that the next Article IV consultation be held on the standard 12- ### Real sector developments - COVID-19 pandemic and earthquake severely affected 2020 growth, especially through their impact on services. - The economy is projected to rebound strongly in 2021. - Real GDP growth (actual/proj.), 2017–26 (percent): 3.8, 4.0, 2.1, -4.0, 7.8, 3.8, 3.6, 3.5, 3.5, 3.4. - Domestic demand contribution (percent): 3.6, 3.9, 2.2, -4.6, 7.7, 3.5, 3.7, 3.7, 3.7, 3.8. - Consumer Price Index (eop) (percent): 1.8, 1.8, 1.1, 1.1, 2.8, 2.0, 2.2, 2.6, 2.8, 3.0. - CPI (avg.) (percent): 2.0, 2.0, 1.4, 1.6, 2.0, 2.4, 2.5, 2.7, 2.9, 3.0. - Labor market: gains in labor force participation and employment were partially reversed due to the pandemic. - Albania remains one of the poorest countries in Europe: GDP per capita as a share of the EU average shown in figures (no numeric aggregate provided beyond chart). ### Monetary sector developments - Policy interest rate remained at a historical low since the start of the pandemic. - Monetary policy rates series shown: Albania 3-Month Treasury Bill Yield and BoA Monetary policy rate in charts. - Lending/deposit interest rates: charts indicate accommodative financial conditions reflected in local and FX loan and deposit rates. - Private credit to nominal GDP (Percent; denominated in million Lek) increased over time; chart shows series with values from 2007–2020 (no single-table numeric extract beyond charts). - Euroization: Albania remains one of the most euroized countries in the region; share of FX-deposits and FX-loans shown for 2016 Q2 and 2021 Q2. - FX loans to M2 and FX deposits to M2 declined somewhat in recent years; charts show ratios across 2010–2021. ### External sector developments - Current account deficit widened in 2020 and is expected to narrow in 2021, resuming tourism-led improvement in services balance. - Current account balance (Percent of GDP), 2010–2021 chart; Table 3a: Current account (percent of GDP), 2017–26: -7.5, -6.8, -7.6, -8.8, -8.4, -8.0, -7.8, -7.6, -7.5, -7.4. - Goods exports declined in 2020 due to lower textile and energy exports; import growth turned negative in 2020. - Real effective exchange rate appreciated slightly in 2021. - BoA has continued to accumulate FX reserves. - Gross international reserves (billions of Euros), Table 3a: 3.0, 3.4, 3.4, 3.9, 4.3, 4.1, 4.2, 4.4, 4.3, 4.6 (2017–26). - Gross external debt (percent of GDP), Table 3a: 68.8, 65.1, 60.0, 65.5, 68.8, 64.3, 62.9, 61.4, 57.5, 55.8 (2017–26). ### Fiscal sector developments - Fiscal policy was relaxed in 2020 to accommodate shocks and is expected to remain expansionary in 2021, driven by lower revenues and larger spending. - Total revenue and grants (percent of GDP), 2017–26: 27.8, 27.5, 27.2, 26.3, 27.4, 27.6, 27.5, 27.6, 27.6, 27.5. - Total expenditure (percent of GDP), 2017–26: 29.7, 28.8, 29.2, 33.2, 34.2, 33.0, 31.3, 29.9, 29.9, 29.9. - Overall balance (percent of GDP), 2017–26: -2.0, -1.3, -2.0, -6.8, -6.8, -5.4, -3.7, -2.3, -2.3, -2.4. - Primary balance (percent of GDP), 2017–26: 0.1, 0.9, 0.1, -4.7, -4.5, -3.2, -1.5, 0.0, 0.0, 0.0. - General government debt (percent of GDP), 2017–26: 71.9, 69.5, 67.3, 77.2, 80.6, 79.0, 78.6, 77.6, 75.5, 74.1. - Gross financing needs, 2020 chart and Table 2a show high financing requirements; Selected Western Balkans sovereign spreads declining since September 2020 (Last available data: Nov. 8, 2021). ### Banking sector developments - Nonperforming loans (NPLs) reached a historically low level in September (2021) but ratio remains higher than regional peers. - Capital ratios of the banking system are above regulatory requirements, although buffers are declining. - A large share of FX loans remains unhedged; foreign-owned banks have been deleveraging. - Banking system liquidity has remained adequate, but financial intermediation is low in Albania. - IMF Core Indicators of Financial Soundness, Table 5 highlights: - Regulatory capital as percent of risk-weighted assets (Dec-12 to Sep-21): 16.2, 18.0, 16.8, 15.7, 15.7, 16.6, 18.3, 18.3, 18.3, 18.3. - Nonperforming loans (gross) as percent of total loans (Dec-12 to Sep-21): 22.5, 23.5, 22.8, 18.2, 18.3, 13.2, 11.1, 8.4, 8.1, 6.5. - Foreign currency-denominated loans to total loans (Dec-12 to Sep-21): 64.5, 63.0, 62.4, 60.8, 58.6, 56.4, 56.1, 51.2, 50.3, 49.6. ### Electricity sector - Electricity generation was high in the first months of 2021, following a pattern similar to the 2018 record year. - Current bill collections by OSHEE in early 2021 are high (monthly series in chart). - Electricity distribution losses have declined from highs in 2014–2016 (monthly series in chart). - Tariffs for households are among the lowest in Europe owing to reliance on low-cost hydropower (Electricity Prices for Household Consumers chart; Albania positioned among lowest in provided chart). ### Climate change and environment - Albania’s emissions per capita are well below the CESEE median (Greenhouse Gas Emissions chart: Megaton of CO2 per GDP PPP in constant 2019 USD across 1995–2019). - Transportation sector accounts for the largest share of greenhouse gas emissions (Greenhouse Gas Emission by Activity, 2019 chart). - Hydropower is the sole source of electricity and heat production, making Albania vulnerable to weather conditions (Electricity and Heat Production by Source, 2018: Hydroelectricity dominant). - Environmental taxes are an important contributor to government revenues (Environmental Taxes, 2019 chart; categories and percent of GDP shown across countries). ### Key macroeconomic framework and indicators (selected exact figures) - Real GDP growth (2017–26): 3.8; 4.0; 2.1; -4.0; 7.8; 3.8; 3.6; 3.5; 3.5; 3.4. - Consumer Price Index (eop), 2021: 2.8 percent. - Overall balance (percent of GDP), 2021: -6.8. - General government debt (percent of GDP), 2021: 80.6. - Gross international reserves (billions of Euros), 2021: 4.3. - Gross external debt (percent of GDP), 2021: 68.8. - Current account balance (percent of GDP), 2021: -8.4. - Broad money growth, 2021: 9.1 percent. - Private credit growth, 2021: 7.5 percent. - Bank of Albania repo rate (in percent), 2021: 1.0 (table: BoA repo rate listed as 1.0 for 2021). - IMF Core Indicators: Regulatory capital as percent of risk-weighted assets (Sep-21): 18.3; Nonperforming loans (gross) as percent of total loans (Sep-21): 6.5. ### External financing and reserve metrics - Current account (millions of euros), 2021: -1,211 (Table 3b). - Gross reserves (millions of euros), 2021: 4,306 (Table 3b). - External financing requirement—Total financing requirement (millions of euros), 2021: 1,775 (Table 7). - Total financing sources (millions of euros), 2021: 1,775 (Table 7). - Foreign direct investment, net (millions of euros), 2021: 944 (Table 7). *Source: IMF staff estimates and calculations, Albanian authorities (extracted from the supplied content unit).* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### External Risks - Global resurgence of the Covid-19 pandemic. (possibly due to vaccine-resistant variants, leading to costly containment efforts and persistent behavioral changes). - Relative Likelihood: Medium - Time Horizon: ST - Expected Impact: High. Reduced cross-border movements would adversely affect the tourism sector. Growth deterioration in Albania’s main export destinations and sources of remittances might spill over to Albania through lower demand for exports and a decline in remittances. All these would weigh on Albania’s economic activity, fiscal performance, and financial stability. - Policy Response: - Adjust composition of fiscal spending to better target policies to support health care, the most vulnerable, and the economy. - Adopt a credible revenue-based fiscal consolidation plan and seek additional financing. - Closely monitor and manage fiscal and financial sector risks. - De-anchoring of inflation expectations in the U.S. leads to rising core yields and risk premia (earlier-than expected Fed tightening; front-loaded tightening of financial conditions). - Relative Likelihood: Medium - Time Horizon: ST - Expected Impact: High. Tighter global financial conditions would reduce capital inflows, create depreciation pressures, and worsen debt dynamics. Negative impact in the near term will partly be mitigated by Albania’s high level of foreign reserves. - Policy Response: - Adjust fiscal spending to better target support and strengthen debt and liquidity management. - Adopt a credible revenue-based fiscal consolidation plan and seek additional financing. - Be prepared to tighten monetary policy. - Closely monitor and manage fiscal and financial sector risks. - Rising commodity prices amid bouts of volatility. Commodity prices increase by more than expected against a weaker U.S. dollar, post-pandemic pent-up demand and supply disruptions, and for some materials, accelerated plans for renewable energy adoption. Uncertainty surrounding each of these factors leads to bouts of volatility, especially in oil prices. - Relative Likelihood: Medium - Time Horizon: ST - Expected Impact: Medium. Volatility in energy prices could result in large swings in the current account, increase budget deficit and fiscal risks through increased support to the energy sector, de-anchor inflation expectations, and endanger economic recovery. - Policy Response: - Clear communication of the BoA on the temporary nature of the energy price increase. - Better target budget support to those most in needs and avoid broad subsides. - Closely monitor and manage fiscal risks and address their root causes. - Reinvigorate electricity and related water sector reforms. ### Domestic Risks - Uncontrolled Covid-19 local outbreaks and subpar/volatile growth (in the event of slower-than-expected pace of vaccination, forcing new lockdowns). - Relative Likelihood: Medium - Time Horizon: ST - Expected Impact: High. Reduced cross-border movements would adversely affect the tourism sector. A full lockdown would also negatively weigh down other sectors, derailing recovery. Should market access be reduced, fiscal space to support the economy would also be affected. - Policy Response: - Be prepared to adjust composition of fiscal spending to better target policies to support health care, the most vulnerable, and the economy. - Adopt a credible revenue-based fiscal consolidation plan and seek additional financing. - Closely monitor and manage fiscal and financial sector risks. - Poorly designed PIM projects and PPPs & increased contingent liabilities - Relative Likelihood: High - Time Horizon: MT - Expected Impact: Medium. Engaging in poorly designed PIM and PPP contracts for infrastructure investment could impede the efficiency of public investment, and create large contingent liabilities, the realization of which could undermine fiscal and debt sustainability. - Policy Response: - Strengthen public investment management and governance and transparency of PPPs. - Upgrade the capacity of the Ministry of Finance to undertake financial analysis of new PPP contracts and their direct or contingent impact on fiscal for the lifetime of the project. - Intensification of financial sector vulnerabilities - Relative Likelihood: Medium - Time Horizon: ST, MT - Expected Impact: Medium. A surge in non-performing loans could lower capital adequacy levels, affecting banking sector stability and the ability to extend credit to the private sector. - Policy Response: - Closely monitor the financial sector and continue to improve NPL resolution framework. - Continue to strengthen and implement the capital and liquidity regulatory framework and remain vigilant through onsite and off-site supervision. - Rollover of public debt - Relative Likelihood: Medium - Time Horizon: ST, MT - Expected Impact: Medium. Elevated levels of net domestic borrowing could raise concerns about the ability of foreign-owned banks with limits on exposure to the sovereign to absorb additional borrowing and/or crowding out credit to private sector. - Policy Response: - Diversify the debtholder base and lengthen maturity. - Improve market communication and coordination with the central bank. - Promptly resume revenue-based fiscal adjustment and debt reduction once the pandemic recedes. - Social discontent and political instability - Relative Likelihood: Low - Time Horizon: ST, MT - Expected Impact: High. Social tensions erupt as lingering impact of the pandemic and inadequate policy responses (including to the effects of “scarring”) cause persistent economic hardship and exacerbate preexisting socioeconomic inequities. - Policy Response: - Reforms, including those to strengthen the rule of law, are key for medium-term growth and prospects for EU accession talks. - Ensure that reforms are grounded in careful policy analysis and a consultative preparation process. - Adverse weather conditions - Relative Likelihood: Medium - Time Horizon: ST, MT - Expected Impact: Medium. Drought could affect electricity generation. Power shortages could damage growth. Electricity imports could pose quasi-fiscal risks for the budget. - Policy Response: - Reinvigorate the implementation of the electricity sector reform. - Finalize financial restructuring plans to restore the financial viability of public electricity companies. - Prepare a backup power supply plan. ### Notes on Risk Assessment - The Risk Assessment Matrix (RAM) shows events that could alter the baseline path. The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability <10 percent, “medium” a probability 10–30 percent, and “high” a probability 30–50 percent). *International Monetary Fund — Annex I. Risk Assessment Matrix* ### Annex II. Figure 2. Albania: Public DSA - Composition of Public Debt and Alternative Scenarios ### Annex II. Figure 2. Albania: Public DSA - Composition of Public Debt and Alternative Scenarios ### Baseline and Alternative Scenario Assumptions (Selected indicators) - Real GDP growth (Baseline): - 2021: 7.8 - 2022: 3.8 - 2023: 3.6 - 2024: 3.5 - 2025: 3.5 - 2026: 3.4 - Real GDP growth (Historical scenario): - 2021: 7.8 - 2022: 1.8 - 2023: 1.8 - 2024: 1.8 - 2025: 1.8 - 2026: 1.8 - Inflation (Baseline and Historical identical series): - 2021: 1.5 - 2022: 1.7 - 2023: 1.6 - 2024: 1.8 - 2025: 1.9 - 2026: 1.9 - Primary Balance (Baseline): - 2021: -4.5 - 2022: -3.2 - 2023: -1.5 - 2024: 0.0 - 2025: 0.0 - 2026: 0.0 - Primary Balance (Historical scenario): - 2021: -4.5 - 2022: -1.1 - 2023: -1.1 - 2024: -1.1 - 2025: -1.1 - 2026: -1.1 - Primary Balance (Constant Primary Balance scenario): - 2021: -4.5 - 2022: -4.5 - 2023: -4.5 - 2024: -4.5 - 2025: -4.5 - 2026: -4.5 - Effective interest rate (Baseline): - 2021: 1.9 - 2022: 3.7 - 2023: 3.9 - 2024: 4.3 - 2025: 4.7 - 2026: 5.1 - Effective interest rate (Historical scenario): - 2021: 1.9 - 2022: 3.7 - 2023: 4.1 - 2024: 4.6 - 2025: 5.2 - 2026: 5.8 ### Composition of Public Debt and Key Debt Indicators (presentations / projections) - Charts and projections cover: - Gross Nominal Public Debt (in percent of GDP), by scenario (Baseline, Historical, Constant Primary Balance), for years 2019–2026 (projection). - Public Gross Financing Needs (in percent of GDP), 2019–2026 (projection). - Debt by maturity (Medium and long-term vs. Short-term), 2010–2026 (projection). - Debt by currency (Local currency-denominated vs. Foreign currency-denominated), 2010–2026 (projection). ### Realism of Baseline Assumptions and Forecast Track Record (high-level diagnostics) - Forecast Track Record, Real GDP Growth (2011–2019): - Albania median forecast error: -0.48 - Percentile rank: 39% - Forecast Track Record, Primary Balance (2011–2019): - Albania median forecast error: 0.67 - Percentile rank: 80% - Forecast Track Record, Inflation (Deflator) (2011–2019): - Albania median forecast error: -1.60 - Percentile rank: 7% - Assessing projected fiscal adjustment (distribution diagnostics): - 3-year CAPB adjustment greater than 3 percent of GDP: Albania percentile rank of 13% - 3-year average CAPB level greater than 3.5 percent of GDP: Albania percentile rank of 70% - Notes: - 1/ Plotted distribution includes all countries, percentile rank refers to all countries. - 2/ Projections made in the spring WEO vintage of the preceding year. - 3/ Not applicable for Albania, as it meets neither the positive output gap criterion nor the private credit growth criterion. - 4/ Data cover annual observations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. ### Macro-Fiscal Stress Tests: Shock Assumptions (selected series) - Baseline (selected): - Real GDP growth: 2021: 7.8; 2022: 3.8; 2023: 3.6; 2024: 3.5; 2025: 3.5; 2026: 3.4 - Inflation: 2021: 1.5; 2022: 1.7; 2023: 1.6; 2024: 1.8; 2025: 1.9; 2026: 1.9 - Primary balance: 2021: -4.5; 2022: -3.2; 2023: -1.5; 2024: 0.0; 2025: 0.0; 2026: 0.0 - Effective interest rate: 2021: 1.9; 2022: 3.7; 2023: 3.9; 2024: 4.4; 2025: 4.8; 2026: 5.2 - Primary Balance Shock (selected): - Real GDP growth: 2021: 7.8; 2022: 3.8; 2023: 3.6; 2024: 3.5; 2025: 3.5; 2026: 3.4 - Primary balance: 2021: -4.5; 2022: -3.9; 2023: -2.3; 2024: -0.7; 2025: 0.0; 2026: 0.0 - Effective interest rate: 2021: 1.9; 2022: 3.7; 2023: 3.9; 2024: 4.4; 2025: 4.8; 2026: 5.2 - Real GDP Growth Shock: - Real GDP growth: 2021: 7.8; 2022: 1.5; 2023: 1.3; 2024: 3.5; 2025: 3.5; 2026: 3.4 - Inflation: 2021: 1.5; 2022: 1.1; 2023: 1.0; 2024: 1.8; 2025: 1.9; 2026: 1.9 - Primary balance: 2021: -4.5; 2022: -4.1; 2023: -3.1; 2024: 0.0; 2025: 0.0; 2026: 0.0 - Effective interest rate: 2021: 1.9; 2022: 3.7; 2023: 4.0; 2024: 4.4; 2025: 4.8; 2026: 5.2 - Real Interest Rate Shock: - Effective interest rate increases (selected): 2022: 3.7; 2023: 4.5; 2024: 5.4; 2025: 6.3; 2026: 7.1 - Real Exchange Rate Shock (selected): - Inflation in 2022: 5.4 (vs. Baseline 1.7) - Effective interest rate (selected): 2022: 3.9; 2023: 3.85; 2024: 4.2; 2025: 4.6; 2026: 5.0 - Combined Shock (selected): - Real GDP growth: 2021: 7.8; 2022: 1.5; 2023: 1.3; 2024: 3.5; 2025: 3.5; 2026: 3.4 - Primary balance: 2021: -4.5; 2022: -4.7; 2023: -4.0; 2024: -0.7; 2025: 0.0; 2026: 0.0 - Effective interest rate: 2021: 1.9; 2022: 3.9; 2023: 4.5; 2024: 5.4; 2025: 6.3; 2026: 7.1 - IMF Recommended Fiscal Adjustment scenario (selected): - Real GDP growth: 2021: 7.8; 2022: 3.6; 2023: 3.2; 2024: 3.5; 2025: 4.2; 2026: 4.5 - Primary balance: 2021: -4.5; 2022: -2.4; 2023: 0.0; 2024: 1.5; 2025: 1.4; 2026: 1.0 - Effective interest rate (selected): 2022: 3.7; 2023: 3.907; 2024: 4.2; 2025: 4.5; 2026: 4.9 ### Stress-Test Outcomes (indicators shown) - Stress test outputs present projections for: - Gross Nominal Public Debt (in percent of GDP) under Baseline and multiple shocks, 2021–2026. - Gross Nominal Public Debt (in percent of Revenue) under Baseline and multiple shocks, 2021–2026. - Public Gross Financing Needs (in percent of GDP) under Baseline and multiple shocks, 2021–2026. - Additional Stress Tests noted: - Interest Shock + Potential Growth Shock - IMF Recommended Fiscal Adjustment ### Public DSA Risk Assessment (selected diagnostics and thresholds) - Benchmarks and diagnostic thresholds referenced: - Debt burden benchmark of 70% (cells green if benchmark not exceeded under specific shock or baseline; yellow if exceeded under specific shock but not baseline; red if benchmark exceeded under baseline). - Gross financing needs benchmark of 15% of GDP (similar color rules applied). - Risk-assessment benchmark ranges: - Bond spreads: 200 and 600 basis points - External financing requirement: 5 and 15 percent of GDP - Change in share of short-term debt: 0.5 and 1 percent - Public debt held by non-residents: 15 and 45 percent - Share of foreign-currency denominated debt: 20 and 60 percent - Indicators for 2020 (values shown in the assessment table): - Bond spread (24-Jul-21 through 22-Oct-21 average): 254 bp - External Financing Requirement (in percent of GDP): 12 - Annual Change in Short-Term Public Debt (in percent of total): -2% - Public Debt in Foreign Currency (in percent of total): 48% - Public Debt Held by Non-Residents (in percent of total): 44% ### External Debt Sustainability (Annex II. Table 1, selected figures, 2016–2026) - Baseline: External debt (percent of GDP): - 2016: 73.5 - 2017: 68.8 - 2018: 65.1 - 2019: 60.0 - 2020: 65.5 - 2021: 67.7 - 2022: 63.3 - 2023: 62.0 - 2024: 60.5 - 2025: 56.6 - 2026: 55.0 - Change in external debt: - 2016: 0.6 - 2017: -4.8 - 2018: -3.7 - 2019: -5.2 - 2020: 5.5 - 2021: 2.3 - 2022: -4.5 - 2023: -1.3 - 2024: -1.5 - 2025: -3.9 - 2026: -1.7 - Identified external debt-creating flows (4+8+9): - 2016: -3.2 - 2017: -6.8 - 2018: -9.5 - 2019: -0.2 - 2020: 4.8 - 2021: 1.4 - 2022: -2.9 - 2023: -0.3 - 2024: -0.2 - 2025: -2.6 - 2026: -0.1 - Current account deficit, excluding interest payments (percent of GDP): - 2016: 6.8 - 2017: 6.7 - 2018: 5.9 - 2019: 6.8 - 2020: 7.9 - 2021: 7.5 - 2022: 7.4 - 2023: 7.3 - 2024: 7.3 - 2025: 7.3 - 2026: 7.3 - Net non-debt creating capital inflows (negative shown): - 2016: -7.9 - 2017: -7.6 - 2018: -6.7 - 2019: -6.7 - 2020: -6.0 - 2021: -2.6 - 2022: -8.6 - 2023: -6.1 - 2024: -6.0 - 2025: -8.3 - 2026: -6.0 - Automatic debt dynamics (contribution, percent of GDP): - 2016: -2.1 - 2017: -6.0 - 2018: -8.7 - 2019: -0.2 - 2020: 2.8 - 2021: -3.6 - 2022: -1.8 - 2023: -1.6 - 2024: -1.5 - 2025: -1.5 - 2026: -1.4 - Contribution from nominal interest rate (percent): - 2016: 0.8 - 2017: 0.7 - 2018: 0.9 - 2019: 0.8 - 2020: 0.9 - 2021: 0.9 - 2022: 0.6 - 2023: 0.6 - 2024: 0.5 - 2025: 0.5 - 2026: 0.4 - Contribution from real GDP growth (percent): - 2016: -2.3 - 2017: -2.5 - 2018: -2.4 - 2019: -1.4 - 2020: 2.4 - 2021: -4.4 - 2022: -2.4 - 2023: -2.2 - 2024: -2.1 - 2025: -2.0 - 2026: -1.8 - Residual, incl. change in gross foreign assets (2-3) (percent): - 2016: 3.8 - 2017: 2.1 - 2018: 5.9 - 2019: -5.0 - 2020: 0.7 - 2021: 0.9 - 2022: -1.5 - 2023: -0.9 - 2024: -1.3 - 2025: -1.3 - 2026: -1.6 - External debt-to-exports ratio (in percent): - 2016: 253.5 - 2017: 217.6 - 2018: 205.8 - 2019: 191.6 - 2020: 282.8 - 2021: 264.5 - 2022: 224.0 - 2023: 198.7 - 2024: 187.0 - 2025: 171.4 - 2026: 164.6 - Gross external financing need (in billions of US dollars): - 2016: 2.8 - 2017: 3.0 - 2018: 3.6 - 2019: 2.3 - 2020: 2.7 - 2021: 2.7 - 2022: 2.8 - 2023: 3.1 - 2024: 3.3 - 2025: 3.9 - 2026: 3.6 - Gross external financing need (in percent of GDP): - 2016: 23.8 - 2017: 23.0 - 2018: 23.8 - 2019: 14.9 - 2020: 18.0 - 2021: (table shows additional contextual figures; full series in source) ### External Debt Sustainability: Bound Tests (selected scenarios) - Shocks applied include: - Permanent one-half standard deviation shocks to interest rate, growth, current account (individual shocks). - Permanent 1/4 standard deviation shocks to real interest rate, growth rate, current account balance (combined scenarios). - One-time real depreciation of 30 percent occurs in 2021 (real depreciation shock). - Representative box values shown: - Historical scenario average: 72 (context: gross nominal public debt percent of GDP) - Baseline average: 55 - Selected scenario averages shown (e.g., CA shock average 59; Combined shock average 59; 30% depreciation scenario average 82) - Growth shock (in percent per year) box values: - Baseline: 1.8 - Scenario: 2.4 - Historical: 3.6 - Non-interest current account shock (in percent of GDP) box values: - Baseline: -7.3 - Scenario: -8.2 - Historical: -8.0 - Gross financing need under baseline shown on right scale in bound tests charts. ### External Sector Assessment (Annex III, selected findings and vulnerabilities) - 2020 assessment summary: - The external position of Albania in 2020 was moderately weaker than the level implied by medium-term fundamentals and desirable policies. - EBA-Lite CA-model results indicate a current account gap of -1.2 percent of GDP, implying a REER overvaluation of 4.9 percent. - Current account developments: - The current account deficit increased to 8.8 percent of GDP in 2020. - Drivers: large drop in exports of goods, smaller decline in imports (support from earthquake reconstruction and public investment), large drop in exports of services (tourism) offset partly by lower imports of services. - Remittances dropped by around 4 percent in nominal terms compared to 2019; net private transfers increased by 34 percent in nominal terms compared to 2019 (mostly due to private transfers related to earthquake reconstruction and other real estate purchases). - FDI remained resilient and provided continued capital inflows. - In 2021H1, the CA deficit was only marginally lower than 2020H1. - Outlook and vulnerabilities: - Current account deficit expected to improve gradually as: - Imports linked to FDI in large energy projects (especially the Trans-Adriatic Pipeline (TAP)) decline; - Imports from earthquake reconstruction and public investment projects decline as projects complete; - Net tourism inflows and expansion of domestic energy production increase exports in medium term. - Vulnerabilities: reliance on hydropower, dependence on tourism and remittances, concentration of export destinations (Italy and Greece) — exposure to external and weather-related shocks. - REER and NIIP: - CPI-based REER had appreciated about 15 percent since beginning of 2017 through 2020; appreciation resumed in 2021 due to subsiding pandemic effects and strength in remittances and capital inflows. - NIIP deteriorated to about -57 percent of GDP at end-2020 from -52 percent at end-2019, driven by FDI inflows and external borrowing (including Eurobond issuance). - Foreign liabilities about 121 percent of GDP, with over half comprising direct investment liabilities; a large part of other liabilities are long-term public debt. - Medium-term risk: liability profile may become less favorable as FDI from large energy projects tapers off and authorities increase commercial borrowing. *Source: IMF staff.* ### 4. The external position in 2020 is assessed to be moderately weaker than the level ### 4. The external position in 2020 is assessed to be moderately weaker than the level implied by medium-term fundamentals and desirable policy settings. ### External position assessment (2020) - Under the EBA-Lite Current Account approach, the multilaterally consistent cyclically adjusted CA norm in 2020 is estimated at -6.3 percent of GDP. - The cyclically adjusted CA balance is -7.5 percent of GDP, which includes a 1.4 percent adjustment for COVID-19 factors (oil trade and tourism). - Adjusted CA (cyclically adjusted, including COVID-19 adjustor): -7.5 percent of GDP. - CA Norm (adjusted): -6.3 percent of GDP. - CA Gap: -1.2 percent of GDP. - Estimated REER overvaluation: - From CA gap: 4.9 percent overvaluation. - From REER model: 19½ percent overvaluation. - Model components (Albania: Model Estimates for 2020, in percent of GDP): - CA-Actual: -8.8 - Cyclical contributions (from model) (-): -0.3 - COVID-19 adjustor (+): 1.4 - Additional temporary/statistical factors (+): 0.0 - Natural disasters and conflicts (-): 0.4 - Adjusted CA: -7.5 - CA Norm (from model): -6.3 - Adjusted CA Norm: -6.3 - CA Gap: -1.2 - o/w Relative policy gap: 7.2 - Elasticity: -0.25 - REER Gap (in percent): 4.6 (CA model) and 19.5 (REER model) - Staff view: Overvaluation expected to resolve over time with fiscal adjustment and productivity growth supported by structural reforms. - Authorities’ views: Authorities concur with staff’s assessment of the external position and the exchange rate and agree on outlook for a gradual reduction of the current account deficit, the need for fiscal consolidation, and continued structural reforms. ### External financing and reserves (2020) - External financing needs: 21 percent of GDP in 2020. - Almost 75 percent of these needs are banks’ currency and deposits liabilities. - Gross FX reserves at end-2020: - 30 percent of GDP and 188 percent of the ARA metric (including commercial banks’ FX deposits at BoA). - Excluding commercial banks’ FX reserves: 26 percent of GDP and 160 percent of the ARA metric. - Assessment: - Reserves excluding banks’ FX reserves (26 percent of GDP; 160 percent of ARA) remain above the 150 percent upper threshold for floating regimes. - Higher reserve level considered appropriate given vulnerabilities: sensitivity of public debt and private balance sheets to depreciations, sizable unhedged FX loans, risks of euroization, and structurally high fiscal financing needs. - Structural note: Large import-intensive energy projects completion will make attraction of new FDI and rollover of commercial external debt increasingly important for external sustainability and growth. ### Illustrative Adverse Scenario (Annex IV) — overview and macro impacts (2021–2023) - Scenario premise: Significant resurgence of COVID-19 infections in 2022 for EMDCs, tighter global financial conditions, and more challenging market access for emerging markets. - High-level expected effects: - Public debt increases further. - Reserves decline. - Pressures for exchange rate depreciation mount. - Fiscal and external financing gaps from 2022 onwards unless additional IMF or other external financing is mobilized. Key projected indicators (Albania: Adverse Scenario, 2021-2023; Percent of GDP unless otherwise specified) - Real Sector — GDP growth (percent): - Baseline: 2021: 7.8; 2022: 3.8; 2023: 3.6 - Adverse scenario: 2021: 7.8; 2022: 0.5; 2023: 1.5 - Balance of Payments: - Current Account Balance: - Baseline: 2021: -8.4; 2022: -8.0; 2023: -7.8 - Adverse scenario: 2021: -8.4; 2022: -8.6; 2023: -8.4 - Capital Account Balance: 0.5 (2021–2023 baseline and adverse) - Financial Account Balance (- = inflow): - Baseline: 2021: -10.4; 2022: -6.3; 2023: -8.0 - Adverse scenario: 2021: -10.4; 2022: -2.6; 2023: -3.5 - BOP Financing Gap (+ = gap): - Baseline: 0.0 (2021–2023) - Adverse scenario: 2021: 0.0; 2022: 0.5; 2023: 1.0 - Reserves (million Euro): - Baseline: 2021: 4,306; 2022: 4,116; 2023: 4,236 - Adverse scenario: 2021: 4,306; 2022: 3,576; 2023: 3,096 - Reserves in months of imports: - Baseline: 2021: 8.1; 2022: 6.9; 2023: 6.6 - Adverse scenario: 2021: 8.4; 2022: 6.4; 2023: 5.3 - Reserves as percent of ARA EM Metric: - Baseline: 2021: 176; 2022: 164; 2023: 161 - Adverse scenario: 2021: 176; 2022: 148; 2023: 127 - Reserves excluding banks' FX reserves (million Euro): - Baseline: 2021: 3,638; 2022: 3,418; 2023: 3,513 - Adverse scenario: 2021: 3,638; 2022: 2,878; 2023: 2,373 - Reserves excluding banks' FX reserves in months of imports: - Baseline: 2021: 6.8; 2022: 5.7; 2023: 5.5 - Adverse scenario: 2021: 7.1; 2022: 5.2; 2023: 4.0 - Reserves excluding banks' FX reserves as percent of ARA EM Metric: - Baseline: 2021: 149; 2022: 136; 2023: 133 - Adverse scenario: 2021: 149; 2022: 119; 2023: 97 - Fiscal Sector: - Tax Revenue (percent of GDP): - Baseline: 2021: 25.6; 2022: 25.8; 2023: 25.8 - Adverse scenario: 2021: 25.6; 2022: 25.2; 2023: 25.0 - Expenditure (percent of GDP): - Baseline: 2021: 34.2; 2022: 33.0; 2023: 31.3 - Adverse scenario: 2021: 34.2; 2022: 33.8; 2023: 32.3 - Fiscal balance (percent of GDP): - Baseline: 2021: -6.8; 2022: -5.4; 2023: -3.7 - Adverse scenario: 2021: -6.8; 2022: -6.9; 2023: -5.7 - Primary balance (percent of GDP): - Baseline: 2021: -4.5; 2022: -3.2; 2023: -1.5 - Adverse scenario: 2021: -4.5; 2022: -4.7; 2023: -3.2 - Fiscal Financing Gap: - Baseline: 0.0 (2021–2023) - Adverse scenario: 2021: 0.0; 2022: 0.5; 2023: 1.4 - Public debt (percent of GDP): - Baseline: 2021: 80.6; 2022: 79.0; 2023: 78.6 - Adverse scenario: 2021: 80.6; 2022: 85.0; 2023: 89.1 - Eurobond (percent of GDP): - Baseline: 2021: 4.9; 2022: 0.0; 2023: 3.1 - Adverse scenario: 2021: 4.9; 2022: 0.0; 2023: 0.0 - Scenario narrative specifics: - External: current account deterioration, reduced financial account inflows (lower FDI, capital outflows), reserves drawdown to finance BOP, potential external financing gaps without additional IMF/other financing. - Fiscal: weaker growth lowers revenues while spending remains elevated; adverse scenario assumes no further Eurobond issuances after 2021 and larger drawdown of liquidity buffers, possibly leading to fiscal financing gaps in 2022–23 and raising public debt to almost 90 percent of GDP in 2023. ### Policy options in the adverse scenario - Continue monetary accommodation and keep the domestic financial market liquid. - Target additional fiscal support to ensure adequate healthcare provision and protect the most vulnerable; reallocate budgetary resources where needed; consider additional official financing if financing gaps emerge. - Retain a flexible exchange rate as a shock absorber; use FX interventions only in face of disorderly market conditions and to mitigate large depreciations’ impact on balance sheets. - Strengthen monitoring and management of financial risks for early detection of vulnerabilities; be ready to take further actions to preserve macroeconomic and financial stability if balance of payments pressures and financial stability concerns heighten. ### Capacity Development strategy summary (Annex V) - Albania is a heavy CD user across a wide range of areas; authorities value Fund CD for timeliness and tailored assistance. - BoA track record: broadly satisfactory in implementing CD advice and driving forward-looking agenda. - Fiscal CD: mixed progress due to limited absorptive capacity, staffing shortages, and possible political/social concerns. Some areas with progress: establishing a fiscal risk unit, arrears monitoring and clearance, cash forecasting and management. Weak ownership and lagging progress on PIM and active monitoring of PPPs and SOE risks. - CD priorities for FY 2022: - MTRS: update and implement the MTRS prepared in 2019 to raise tax revenue and rebuild buffers. - PIM: improve public investment management to close infrastructure gap and replenish fiscal buffers; stronger ownership needed. - Fiscal risks: continued TA on fiscal risks and contingent liabilities, including PPPs, SOEs, credit guarantee schemes, and arrears prevention. - Cash and debt management: strengthen given elevated debt, high gross financing requirements, sizable arrears, and increasing reliance on external commercial financing. - Banking supervision: continued TA to address likely increase in NPLs and weakened capital positions post-pandemic. - AML/CFT: CD needs remain as Albania continues to have strategic deficiencies. ### Tourism—impact of the pandemic and outlook (Annex VI) - Dependence on tourism: - Total contribution of tourism and related activities peaked at 18 percent of GDP in 2019 (staff calculations). - Direct contribution in 2019: 7.6 percent of GDP. - Official statistics: more than one in ten formal jobs were generated by tourism and related sectors (INSTAT Q3 2019: 75,800 jobs in accommodation and food services = 6 percent of total jobs; adding related sectors yields 127,000 jobs = 10 percent of total). - World Travel and Tourism Council estimates one in five jobs in Albania linked to tourism, travel, and related activities. - Tourism generated half of total export receipts in 2019 (net impact mitigated by outbound travel spending). - On average, tourism inflows pre-pandemic were above 13 percent of GDP, while net flows were just 2 percent of GDP. - Pre-pandemic trajectory: - Foreign tourist arrivals more than tripled to 6.4 million in the decade to 2019 (excluding arrivals of Albanian citizens residing abroad). - Albania attracted growing tourists per capita but lower-spending tourists compared to established destinations. - Over half of tourists came from neighboring Western Balkan countries; 17 percent from Greece and Italy. - Pandemic impact (2020): - Global international arrivals dropped by 74 percent year-on-year in 2020 (UNWTO). - Albania: international arrivals dropped by 59 percent in 2020. - Total tourism contribution to GDP shrank to 10.4 percent in 2020. - Share of tourism receipts to exports declined from half to one-third in 2020. - Government measures in 2020: one-off cash transfers to tourism sector employees (not extended to informal or part-time workers), tax deferrals, loan moratoria, loan guarantees, temporary increases in social and wage support for small businesses/self-employed. - Job losses in tourism and related sectors were twice higher than for the overall economy (INSTAT: between Q2 2019 and Q2 2021 jobs shrank by 2.5 percent overall vs 5.6 percent for travel and tourism sectors). - Recovery in 2021 and outlook: - Recovery led by regional tourism; Albania maintained open borders without quarantine requirements except Q2 2020. - EU placed Albania on the green list on June 18th (removal of travel restrictions recommended). - Albania targeted non-EU eastern European markets and temporarily removed visa requirements for some countries; established direct flights. - Upswing in cases in August 2021 due to Delta variant; vaccination rollout started April 2021 with about one-third of population fully vaccinated (among the lowest rates in Europe). - Full recovery depends on vaccination speed in Albania and source countries. - Albania expects to have fully vaccinated its adult population by September 2022 (authorities’ expectation). - Staff baseline: return to 2019 level of tourist flows by 2023. - 2021 tourist arrivals projected to vary between 70 percent (baseline) and 80 percent (fastest vaccination scenario) of 2019 levels. - Data to September 2021: total arrivals at 89 percent of January–September 2019 level due to regional and emerging markets pickup; tourists from higher-spending Western European countries at 59 percent of 2019 value for the January–September period. - Staff in-house forecasting tool: predicts return to pre-pandemic levels based on speed of vaccination (assumes immunity after doses administered equal to 120% of population to cover all adults with two shots). *Source: IMF staff analysis as presented in the provided content unit.* ### 6. To support the long-term growth of the sector, the government is investing in ### 1albea2021001 - 6. To support the long-term growth of the sector, the government is investing in ### Investments and fiscal support for tourism - Planned infrastructure investments: - Add two new low-cost airports (one in the north, already inaugurated, and one in the south). - Convert main trading port to cater to tourists. - Upgrade road infrastructure in coastal areas. - Some investments ongoing; others expected to be financed directly by the budget or through PPPs. - Fiscal incentives introduced prior to the pandemic: - Reduced VAT rate to 6 percent from the standard 20 percent for accommodation. - Additional tax breaks for luxury hotels (reduced VAT rate for all services). - 10-year exemptions from the Corporate Income Tax. - Policy proposals under discussion: - An additional standardized guarantee scheme to support the sector with loans. - Market positioning and challenges: - Albania has yet to find a balance between mass tourism and nature and heritage tourism and currently lacks a clear target market. ### Short-term policy guidance for pandemic recovery in tourism - Support measures recommendations: - Support measures for tourism are warranted in the short term given unprecedented challenges. - Such measures should be temporary, well-targeted, and increasingly subject to strict checks on business viability. - Broad tax incentives should be revisited in the context of the adoption of an MTRS to ensure better targeting. - International experience: benefits of broad incentives are rarely passed onto the consumer and provide limited competitive advantage. - Policy design should account for tourism sector workers as one of the most vulnerable segments and enhance social protection, training, and job reallocation. ### Long-term strategy: move from seasonal mass tourism to sustainable year-round tourism - Strategic priorities: - Transform tourism from seasonal, mass tourism to year-round, sustainable tourism. - Investments to upgrade infrastructure should account for environmental sustainability. - Leverage diverse natural landscapes and rich cultural heritage to promote year-round tourism and reach diverse markets. - Aim for quality rather than quantity; diversify source markets and promote operators that do not compete only on price to better withstand future shocks. ### Annex VII — The Dynamics of NPLs and the Pandemic’s Effects: key findings - Banking sector exposure and asset-quality trajectory: - Banks exposed to sectors most impacted by the pandemic, e.g., accommodation and food service sectors. - Households exposure rose from 29.5 percent end-2015 to almost 35 percent in August 2021. - Mortgages represent 23 percent of total loans. - NPL ratio continued on a declining trend and reached 6.5 percent in September. - Timely support (loan moratoria and government guarantees) mitigated initial pandemic impact on borrowers. - Relaxation of loan classification and provision rules until March 2021 might have delayed proper recognition of NPLs. - Historical vulnerabilities: - Persistently high NPLs were a major vulnerability; in 2014Q3 NPLs reached 25 percent of total loans, with some banks registering NPL ratios larger than 50 percent. - Drivers of historical NPLs: shortcomings in bank risk management, exposures to the price bubble in the construction sector, and gaps in supervision and regulation. - Since 2015, progressive implementation of the action plan on NPLs spearheaded by the BoA led to a significant drop in the NPL ratio, principally through write-offs. - Despite improvements, NPLs remain high compared to regional peers. - Macroeconomic and bank-level determinants (panel regression, 2005Q1–2020Q1): - A decrease in Albania’s GDP growth is associated with increases in NPL ratios. - Increases in inflation or in short-term lending rates are associated with higher NPL ratios in some specifications. - Lower growth in the EU and higher global risk aversion are associated with increases in NPLs in Albania. - Bank-level factors: high autocorrelation of NPLs; lower equity to total assets positively correlates with the NPL ratio; higher profitability (ROA) is associated with lower NPLs. - Exchange rate exposure: - About 50 percent of total loans are in foreign currency, and 42 percent of the loans in FX are unhedged. - Depreciations against the euro have resulted in higher NPL ratios, including higher foreign currency NPLs; appreciations have reduced NPLs, both in lek and in FX. - Selected regression estimates (Text Table 1; dependent variable = logit transformation of NPL ratio per bank; sample 2005q1 to 2020q1): - NPL (t-4) coefficients across specifications: 0.704***; 0.675***; 0.625***; 0.763***; 0.640***; 0.709*** (robust standard errors reported in table). - ∆yoy rGDP (t-4) coefficients: -2.488***; -2.598***; -2.659***; -1.481***; -2.360***; -1.752***. - Inflation (t-4) coefficients: 0.116*; 0.115*; 0.115***; 0.043; 0.021; 0.020. - 6m Lending rate (t-4) coefficients: 0.017; 0.014; -0.006; 0.042**; 0.038**; 0.047***. - ∆yoy EU rGDP (t-4) coefficients: -2.493**; -2.730**; -2.590***; -0.283; -0.132; -0.733. - VIX (t-4) coefficients: 0.006*; 0.006; 0.004**; 0.004; 0.001; 0.003. - Equity/Total Assets (t-1) coefficients (bank regressors): -1.399***; -3.068**; -1.410**. - ROA (t-1) coefficients: -0.086***; -0.096***; -0.085***. - Model types reported: Pooled, FE, S-GMM (various columns); Observations: 778 (columns 1–3) and 649 (columns 4–6); Number of banks: 16 (columns 1–3) and 15 (columns 4–6). - R2 examples: 0.750 (pooled); Adjusted R2 0.747; other model diagnostics (Full Hansen, Diff Hansen, AR2) reported in table. - Notes from the analysis: - Available information after 2020Q1 was not included in the sample as the COVID-19 pandemic impact may have not fully materialized on the level of NPLs. - NPL is defined as NPL on banks’ balance sheet plus write-offs to mitigate the regulatory impact on the panel regression estimation. - Robust standard errors in parentheses; significance markers: *** p<0.01, ** p<0.05, * p<0.1. *International Monetary Fund — content unit 1albea2021001* ### 5. The COVID-19 pandemic could result in a significant increase of the NPLs to ### 5. The COVID-19 pandemic could result in a significant increase of the NPLs to ### Projected NPL outcomes and banking-sector stress - Forecast models suggest the NPLs in the banking sector could double on average, reaching 21 percent of total loans for some banks depending on their initial level of NPLs. - The COVID-19 pandemic could result in a significant increase of the NPLs to 15 percent of total loans in Albania. - CET1 ratio is estimated to decline significantly but for most of the banks it would remain above regulatory standards. - Should the adverse scenario materialize (Annex IV), the average NPL ratio in the banking system could reach 17 percent by 2023. - Note on modeling: Due to the lack of availability of reliable bank-level quarterly forecast, the regression models used for forecasting are at the bank year level. ### Mitigating factors, timing, and recognition risks - Improvement in bank management and performance in recent years and the authorities’ timely response to contain the impact of the pandemic on banks’ balance sheets could help limit the expected rise of NPLs. - Staff regressions are based on historical data and do not capture the impact of policy changes implemented since the pandemic nor improvement in bank risk management, and thereby may over-estimate the impact of the pandemic on NPLs. - Policy support measures are expected to delay NPL recognition; as a result, the full impact of the pandemic on banks’ balance sheets may only become visible after more time than historically observed and econometric models suggest. ### Exchange-rate effects on NPLs (regression results) - Text Table 2 summarizes the exchange rate impact: depreciation leads to higher NPL ratio while appreciation leads to lower NPL ratio. - Coefficients (as reported in the table text): - Overall: 6.113** for depreciation; -3.163 for appreciation (with reported standard errors (2.311) and (1.869) respectively). - NPL in FX: 5.842* for depreciation; -4.822** for appreciation (with reported standard errors (2.965) and (1.703) respectively). - NPL in Lek: 11.856** for depreciation; -11.524** for appreciation (with reported standard errors (4.841) and (4.029) respectively). - Plain-language summary of exchange-rate elasticities (as stated in text): - In lek depreciation periods, 1% change of exchange rate leads to 5.8% increase of NPL in FX and 11.9% increase of NPL in lek. - In lek appreciation periods, 1% change in exchange rate leads to 4.8% decrease of NPL in FX and 11.5% decrease of NPL in lek. ### Scenario trajectories (system-level forecasts) - Baseline and adverse scenario paths for the non-performing loans ratio (percent of total loans) are presented for 2020–2023 with the adverse scenario corresponding to Annex IV (chart referenced in text). - Forecasted impact by bank ownership category (weighted averages): - Charts show values for 2020 (in blue) and 2021 forecast (in grey) of NPLs to total loans by Domestic bank, Foreign Non-EU bank, and Foreign EU bank; whisker lines indicate minimum and maximum shares of loans (chart referenced in text). ### Policy responses and authorities’ stance relevant to NPLs and financial stability - Monetary policy and liquidity: - The Bank of Albania (BOA) has kept the policy interest rate at the historical low level of 0.5 percent and provided unlimited liquidity to banks. - The unlimited liquidity provision is envisaged to end in the first quarter of 2022. - The BOA intends to pursue its accommodative monetary policy stance as long as inflationary pressures remain subdued and inflation expectations well anchored. - The BOA will intervene in the foreign exchange market only to contain excessive volatility and build needed reserves, and will continue to promote de-euroization of credits and deposits. - Banking supervision and asset-quality monitoring: - The banking system is described as supporting the recovery, remaining adequately capitalized and liquid, with no discernible impact on NPLs to date. - The BOA will closely monitor banks’ asset quality; it stands ready to conduct thorough asset quality reviews on a case-by-case basis and take remedial action to restore adequate capital buffers, if needed. - Fiscal context and buffers: - The authorities aim to bring the primary balance into equilibrium by 2024 and keep it unchanged thereafter (Organic Budget Law), which would lead to a steady decline in the public debt to GDP ratio over time. - The authorities intend to issue a Eurobond for 700 million euro by the end of the year and to use the 2021 SDR allocation for contingent spending. - A Medium Term Revenue Strategy (MTRS) is being developed with Fund assistance with the aim of raising additional revenue of up to 3 per cent of GDP over four years. *Source: IMF Staff calculations and Albania: Staff Report for the 2021 Article IV Consultation — Informational Annex (excerpts).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1albea2021001.pdf_