## 1albea2022004 ## Source details **Canonical URL:** [1albea2022004](https://www.imf.org/-/media/files/publications/cr/2022/english/1albea2022004.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1albea2022004.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1albea2022004.pdf.json) --- ### Context - Albanian economy resilient since 2019 but faces new challenges from soaring international food and energy prices, tighter global financial conditions, and an economic slowdown in Europe. - Direct exposures to Russia and Ukraine are limited. - Past efforts to build policy buffers and a broadly appropriate macroeconomic policy mix during 2020–21 helped Albania withstand the earthquake and pandemic shocks. - Implementation of past Fund advice remains uneven. - Local elections set for May 2023. - Pandemic largely receded: relatively low vaccination rate but hospitalization contained; all pandemic restrictions lifted and related support measures lapsed. ### Recent developments — Growth, Labor, and Fiscal - Growth and activity - Real GDP grew by 8.5 percent in 2021, driven by tourism recovery, a construction boom (partly post-earthquake reconstruction), and a record year for electricity production. - H1 2022 real activity grew by more than 4 percent y-o-y; January–September tourist arrivals were 9 percent above the historical peak of 2019. - Electricity production below historical average in 2022H1; Albania was a net importer of electricity in 2022H1. - Labor - Employment and labor force participation recovered to pre-pandemic levels. - Fiscal - Fiscal consolidation in 2021: deficit considerably smaller than projected in the 2021 Article IV staff report due to revenue overperformance and under-execution of capital spending. - Public debt declined to 74 percent of GDP at end-2021. - Government accumulated a liquidity buffer of almost 5 percent of GDP at end-2021 thanks to the €650 million Eurobond (4 percent of GDP). - 2022 budget: expected to narrow considerably; government posted an overall surplus in the first three quarters of the year. - Targeted support to the most vulnerable totaled 0.6 percent of GDP cumulatively. - Broad subsidies for electricity SOEs totaled 1 percent of GDP in revisions. - Primary deficit projected to halve to 1.3 percent of GDP. - Public debt projected to decline further to just under 70 percent of GDP. - Prices, money, and credit - Headline inflation reached 8.3 percent in October (highest in over two decades), driven by food and energy; food and energy account for half of the consumption basket. - Core inflation accelerated rapidly from a low base. - Private sector wages rose faster than CPI in 2022H1; two-year ahead inflation expectations risen to considerably above the central bank’s 3 percent target. - Bank of Albania stopped unlimited liquidity provision in February and raised the policy rate in five steps from 0.5 percent to 2.75 percent in November. - Private credit growth remains strong, driven by FX credit growth and increasing FX deposits from large FX inflows (tourism, FDI, remittances). - External and FX - Despite a negative terms of trade shock, current account expected to remain broadly stable in 2022 supported by tourism. - Reserves about €5 billion at end-October (around 200 percent ARA metric). - Lek experienced brief volatility in March; modest FX intervention calmed markets and lek/euro has slightly appreciated since. - Financing conditions - Yields on domestic government bonds have continued to rise; many local bond auctions undersubscribed amid heightened uncertainty and rising inflation. ### Outlook and risks - Staff projections - Real GDP projected to grow by 3.7 percent in 2022. - Growth forecast to slow to 2.2 percent in 2023. - Headline inflation expected to peak in coming months and start receding in 2023, returning to the BoA’s 3 percent target by mid-2024. - Staff assumes policy rate will reach 3–3.5 percent in 2022 and 4–4.5 percent in 2023. - Core inflation expected to peak in 2023. - Growth expected to converge to potential of 3.4 percent over the medium-term. - Key risks (tilted to the downside) - Further increases in food and energy prices, potentially triggering larger second-round effects and social unrest. - Higher and more persistent inflation weighing on real income and growth. - More significant tightening in global financial conditions hampering access to external market financing. - Vulnerability to unfavorable weather conditions and a reversal in real estate prices given sector’s growing contribution and banks’ rising exposure to the sector. - Mitigating factor: high level of FX reserves. ### Box 1 — Russia’s War Against Ukraine: Albania’s Exposure and Responses - Overall: limited direct exposures; main impacts via higher food and energy prices, tighter financing conditions, and lower demand from EU trading partners. - Trade and energy - Low trade exposures to Russia and Ukraine compared to other Western Balkans; Albania secured uninterrupted supplies of seed oil, cereals, and fertilizers albeit at higher prices. - Albania does not use natural gas and generates electricity entirely from hydropower; unfavorable weather can create energy shortfalls. - A total Russian gas shut off could affect Albania through sharply higher prices for imported electricity. - Tourism and finance - Small share of tourists from Russia and Ukraine; 2022 best tourism season on record. - Albania imposed sanctions on Russia and Belarus; no Russian bank operates in Albania; some foreign-owned banks have exposures to Russia but are standalone subsidiaries and have remained stable and liquid. - Investment: no reported inward or outward FDI from Russia and Ukraine; portfolio investments in Russian and Ukrainian assets negligible. - Policy responses - 2022 Budget amended twice to provide targeted support of 0.6 percent of GDP; government increased minimum wage from ALL 30,000 to ALL 34,000. - Electricity tariffs kept unchanged through untargeted subsidies to electricity SOEs in 2022 totaling 1.3 percent of GDP. - Authorities considering complementing broad subsidies with a temporary higher block tariff for high-consumption households. ### Authorities’ views (summary) - Authorities broadly share staff’s assessment on outlook and risks and emphasize unusually large uncertainty. - Highlight importance of preparing alternative scenarios. - Weather conditions significantly impact growth, fiscal deficit, and energy security due to reliance on hydropower. - Bank of Albania sees high inflation as a main threat to macroeconomic stability and long-term growth prospects. ### Policy discussions — Main staff recommendations - Rebuild fiscal policy buffers faster underpinned by revenue mobilization to reduce pressure on monetary policy and facilitate external adjustment and market confidence. - Monetary policy normalization appropriate; supervision should follow rising bank lending (notably FX lending) and real estate-related activities, and take actions to rein in excessive risk taking. - Continue efforts to raise bank capital buffers. - Accelerate structural reforms to lift potential for sustainable, inclusive, and green growth. ### Fiscal outlook and 2023 budget assessment - Draft 2023 Budget aims for further consolidation but is optimistic. - Budget targets a small primary surplus, adhering to the fiscal rule one year ahead of the Organic Budget Law deadline. - Revenue measures planned: amendments to reduce loophole for free professionals in the Income Tax Law and a one-off windfall tax on independent power producers. - Staff view: limited permanent gains expected from these measures; budget revenue projections considered optimistic. - Planned spending highlights: - Transfers to electricity sector SOEs to keep tariffs unchanged for households and most businesses: 0.6 percent of GDP. - Sizable capital spending: 5.5 percent of GDP. - Staff baseline projection for 2023: zero primary balance, reflecting more modest revenue gains and expected spending under-execution, especially with capex. - Government plan to issue a Eurobond in 2023 subject to considerable uncertainty; alternative financing via official external loans and grants, domestic borrowing, and use of the SDR allocation as needed. ### Medium-term fiscal outlook and debt trajectory - Fiscal position expected to stabilize as spending reverts to pre-pandemic norms and fiscal rule upheld. - Projection: a small primary surplus from 2024 and beyond as crisis-related spending is phased out. - Public debt ratio expected to decline to under 64 percent of GDP by 2027. - Gross financing needs (GFNs) will remain sizeable; with higher borrowing costs, interest payments will consume an increasing share of tax revenue. - Staff recommended a more ambitious revenue-based consolidation path to rebuild policy room faster and mitigate rising borrowing costs. ### Medium-Term Revenue Strategy (MTRS) and revenue measures — quantified menu - MTRS is cornerstone of credible fiscal consolidation and should be finalized and implemented without further delay. - Key quantified measures and expected yields (as presented): - Tax policy 1.4–1.7* - Indirect Taxes 0.80 - VAT (starting in 2024, including measures to end exemptions for health, education and financial services; extend coverage to first sale of new residential apartments; review VAT registration threshold) 0.65 - Excise (starting in 2024, including measures to unify tariffs on beer and wine products and remove some key excise exemptions) 0.15 - Direct Taxes 0.6–0.9* - Income taxes (starting in 2023, including measures to bring self-employed professionals under the PIT, remove zero tax bracket for PIT and CIT, make PIT tax brackets and rates more progressive, and introduce simplified turnover-based regime for SMEs) 0.3–0.6* - National and Local Taxes and Tariffs (starting in 2023, property tax and gambling reforms) 0.3 - Revenue administration 0.7 - Tax Administration (starting immediately, to increase VAT compliance in construction, and address "high-risk" non-compliant sectors and high informality) 0.45 - Customs Administration (starting immediately to increase compliance on excise duty on fuels, modernize business processes, and improve risk-based enforcement) 0.25 - TOTAL** 2.1–2.4* - Notes: - *Higher end of the range reflects potential additional gains from removing the zero tax bracket for CIT and PIT for those with an annual turnover above ALL 14 million. - **Estimated revenue gains from the 2023 Budget measures that have been incorporated into the baseline (0.3 percent of GDP) reflect the implementation of a few elements related to the MTRS. - Staff concern: proposed tax amnesty law poses money laundering and governance risks and may adversely affect tax compliance. ### Social protection - Strengthening social protection can enhance crisis management and targeting. - Short-term: better leverage existing structures and programs to improve targeting and coverage beyond current beneficiaries. - Medium-term: update and scale up the existing cash transfer framework and regularly review adequacy and delivery of benefits. - Ongoing work: Social Assistance Modernization Project with IBRD support. ### Electricity sector, SOEs, and fiscal risks - Urgent reforms needed to bring the electricity sector to financial viability and reduce fiscal risks. - Broad-based subsidies should be removed because they disproportionately benefit better-off households and distort price signals. - Gradual tariff adjustments to cost recovery levels critical and must be complemented with measures to support the vulnerable. - Enhance electricity sector transparency and strengthen corporate governance in SOEs. - Government plans transfers to electricity SOEs equivalent to 0.6 percent of GDP to keep tariffs unchanged for households and most businesses. ### Public investment management and PPPs - PIM needs strengthening; many recommendations from the 2016 PIMA remain outstanding. - PPP decisions (estimated at about 40 percent of 2022 GDP reflecting contract value of existing projects and pipeline) continue to be made outside the budgetary process. - Framework for coordinating and managing PPPs suffers important weaknesses; extent of related fiscal risks unclear. - Authorities should strengthen MOFE capacity to act as effective gatekeeper in project selection, evaluation, and monitoring; align PPP and PIM processes into the normal budget cycle. ### Fiscal transparency, arrears, and fiscal risk management - Strengthen fiscal transparency and credibility: all public investment projects should be subject to public investment and procurement frameworks. - Publish public procurement contracts pertaining to pandemic and earthquake recovery spending, names of awarded companies, and beneficial owners. - Minimize use of normative acts to alter the budget. - Reporting and analysis of fiscal risks (including SOE liabilities) should be more forward-looking; need mechanism for systematic monitoring and follow-through on repayment of government on-lending to SOEs. - Conditions for on-lending and guarantees to SOEs and municipalities should be made more stringent. - Arrears persist, particularly related to investment projects and court cases; improve data traceability and automation on arrears. - Third PFM Strategy expected to be finalized in 2023; should address incomplete reforms, setbacks in commitment controls and arrears prevention, and incorporate green PFM practices. - Fiscal Risk Unit: mandate and staffing should be progressively strengthened over the medium term. ### Cash and debt management - Effective cash and debt management crucial amid tougher financing conditions and large GFNs with a sizable share of external debt and large bullet repayments. - Improvements: better coordination between MOFE and BoA; BoA regularly attends Committee on the Management of Debt and Liquidity; revised agreement expands MOFE’s cash management toolbox for foreign currencies. - Continued effective implementation of the latest debt management strategy important. ### Monetary policy and inflation (Reducing Inflation) - Monetary policy should continue to normalize; real policy rates remain negative despite five consecutive policy rate increases due to rising underlying inflation and inflation expectations. - With upside risks to inflation and strong inflation persistence, further policy rate increases are warranted. - BoA should be prepared to raise the policy rate to above its estimated neutral rate of 4.5–5 percent if inflationary pressure does not abate. - Monetary transmission is limited by euroization and relatively low bank credit penetration. - Pace and timing of tightening should consider evolving conditions: - Stronger tightening required if international commodity prices rise and risk second-round effects. - Slower growth, faster fiscal consolidation, or strong core inflation response to policy rate increases would support a more gradual tightening or earlier pause. - Sizable exchange rate movements would affect required policy response. - Exchange rate policy: remain flexible and act as shock absorber; FX interventions reserved for disorderly conditions and modest pre-announced FX purchases. ### Financial stability — vulnerabilities and supervision - Enhanced vigilance needed to identify and deal with financial stability risks preemptively, particularly as monetary conditions tighten. - Banking system performance and risks - Net NPL ratio reached its lowest level of 5.1 percent in September. - Capitalization above regulatory requirements, though one large bank has yet to meet increased macroprudential capital buffer requirements. - Banking system susceptibilities: credit, exchange rate, and interest rate risks due to large unhedged FX loans (a quarter of total loans), prevalence of variable interest rate loans, and large holdings of government bonds. - Selected financial stability indicators (as presented) - Regulatory capital to risk-weighted assets: 18.7 18.7 18.7 18.5 19.3 - Tier 1 capital to risk-weighted assets: 17.4 17.5 17.6 17.4 18.1 - Shareholders' equity as a percent of total assets: 10.1 10.5 10.4 9.9 10.2 - Net NPLs to regulatory capital: 15.5 13.6 11.3 7.1 6.7 - Gross NPLs to total loans: 11.1 8.4 8.1 5.6 5.1 - ROE (annual basis): 13.0 13.5 10.7 12.9 9.4 - ROA (annual basis): 1.3 1.4 1.1 1.3 1.0 - Liquid assets to total assets: 34.2 35.7 34.8 33.3 28.9 - Liquid assets to short-term liabilities (<1Y): 46.2 49.4 47.4 45.4 40.0 - Private sector credit growth: -0.9 6.1 8.9 8.6 11.1 - Bank deposits growth: -1.3 3.9 8.3 9.3 6.7 - Supervision and regulatory actions - BoA to enhance risk-based on-site and off-site inspections and complete focused asset quality reviews (AQRs). - Support for BoA’s efforts to strengthen bank capital buffers, including phase-in of macroprudential and MREL requirements and enhancing capacity to challenge banks’ capital projections. - Prepare for adoption of IFRS 9 standards by end-2023. ### Real estate, construction, and data gaps - Real estate and construction sector becoming conduit for macro-financial linkages due to rising contribution to economic activities and increasing financing from banks and foreign flows. - BoA surveys point to rapid growth of real estate prices. - Significant data gaps on real estate and construction prevent timely monitoring; BoA has collected yearly data to compute loan-to-value, loan-service-to-income, and loan-to-income indicators from ad hoc bank reports. ### Post Financing Assessment (PFA) and capacity to repay the Fund - Fund credit outstanding was 247.3 percent of quota (8.6 percent of gross international reserves) at end-2021 and projected to decline to 211.9 percent of quota at end-2022. - Debt service to the Fund projected to peak in 2024 at 3 percent of gross international reserves. - Albania’s international reserves projected to remain adequate in the medium term at around 170 percent of the ARA metric by 2027. - Net international investment position expected to remain stable at around -50 percent of GDP in 2022. - Public debt sustainable but high; GFNs projected to average 17 percent of GDP in the medium term. - Staff does not recommend extension of the PFA after Fund credit outstanding falls below 200 percent of quota in February 2023. - 2022 update safeguards assessment: Bank of Albania has relatively robust safeguards framework; progress on recommendations to enhance internal audit independence and strengthen legal framework. ### Debt dynamics, DSA, and stress-test results - Baseline projections - Gross debt projected to decline from peak of 75.9 percent in 2020 to 63.6 percent of GDP in 2027. - GFNs projected to remain elevated, averaging about 17 percent of GDP annually between 2023 and 2027. - Interest payments account for 15-20 percent of GFNs, about two-thirds of which are due on domestic debt. - Alternative scenarios - Historical scenario: projects debt to remain at about 74 percent of GDP by 2027. - Constant-primary-balance scenario (primary deficit remains at 1.3 percent of GDP): debt would continue to increase to about 71 percent of GDP by 2027. - Stress tests and stochastic simulations — selected outcomes - Real GDP shock: debt peaks at about 75 percent of GDP in 2024 and stabilizes at about 72 percent of GDP afterwards. - Combined shock: debt would rise and broadly stabilize at 82 percent of GDP by 2027. - Dual shock to real GDP growth and interest rate (assumptions 2023–2027): debt increases to about 81 percent of GDP by 2027. - Adverse asymmetric shock tail: probability for debt to reach about 87 percent of GDP by 2027. - External debt - External debt rose to 63 percent of GDP in 2021 and projected to decline to around 57 percent of GDP by 2027. - External private debt stock expected to remain broadly stable at about 30 percent of GDP. - Assumed public Eurobond operations: €500 million issuance in 2023; €250 million buyback in 2023; repayment of similar amount at maturity in 2025. - External debt service: around 14 percent in 2022 and around 23 percent in 2027 following a large amortization payment in 2027. - IMF Recommended Fiscal Adjustment — Primary balance path (2022–2027): -1.3, 0.0, 1.5, 1.5, 1.0, 1.0 (in percent). ### Data adequacy, TA, and statistical issues - Data provision has some shortcomings but is broadly adequate for surveillance; main obstacles: real sector statistics and weak inter-institutional cooperation. - Significant data gaps on real estate and construction activities. - National accounts improving; quarterly GDP estimates released with a lag of 90 days. - Labor Force Survey assessed as "of insufficient quality." - Monetary and financial statistics conform to MFSMCG methodology; balance of payments compiled with BPM6 and ESA 2010. - Albania participates in the Enhanced General Data Dissemination System (e-GDDS) and publishes data on its National Summary Data Page since June 2017. - Extensive technical assistance provided across Tax Administration, PFM, banking supervision, AML/CFT, IFRS 9, and statistical areas. ### Staff appraisal (summary) - Staff projects economic growth of 3.7 percent in 2022 before slowing to 2.2 percent in 2023. - Inflation has risen sharply and become increasingly broad-based; outlook subject to considerable uncertainty with risks tilted to the downside. - Reducing fiscal vulnerabilities and rebuilding fiscal room fast are critical to risk mitigation. - Implementing an ambitious fiscal consolidation underpinned by a sound MTRS remains the main way forward to rebuild policy buffers, preserve market confidence, and reduce external vulnerabilities. *IMF staff report (2022) — Albania: Article IV mission materials and analysis as presented in the provided content.* ### 2022. The team comprised Y. Sun (head), F. Jamaludin, M. Pinat (all ### 1albea2022004 - 2022. The team comprised Y. Sun (head), F. Jamaludin, M. Pinat (all ### CONTEXT - The Albanian economy has shown considerable resilience since 2019 but faces new challenges from soaring international food and energy prices, tighter global financial conditions, and an economic slowdown in Europe. - Albania’s direct exposures to Russia and Ukraine are limited (Box 1). - Past efforts to build policy buffers and a broadly appropriate macroeconomic policy mix during 2020–21 helped Albania withstand the earthquake and pandemic shocks. - Implementation of past Fund advice remains uneven (Annex I). - Local elections are set for May 2023. - The pandemic has largely receded: despite a relatively low vaccination rate, hospitalization remains contained, all pandemic restrictions have been lifted, and related support measures have lapsed. ### RECENT DEVELOPMENTS — Growth, Labor, and Fiscal - Real GDP grew by 8.5 percent in 2021, driven by tourism recovery, a construction boom (partly post-earthquake reconstruction), and a record year for electricity production. - Employment and labor force participation recovered to pre-pandemic levels. - Fiscal consolidation in 2021: deficit considerably smaller than projected in the 2021 Article IV staff report due to revenue overperformance and under-execution of capital spending. - Public debt declined to 74 percent of GDP at end-2021. - The government accumulated a liquidity buffer of almost 5 percent of GDP at end-2021 thanks to the €650 million Eurobond (4 percent of GDP). - 2022 activity: H1 real activity grew by more than 4 percent y-o-y, supported by services, manufacturing, and construction; January–September tourist arrivals were 9 percent above the historical peak of 2019. - Electricity production below historical average in 2022H1; Albania was a net importer of electricity in 2022H1 (Annex VI). - Inflation: headline inflation reached 8.3 percent in October (highest in over two decades), driven by food and energy; food and energy account for half of the consumption basket. Core inflation accelerated rapidly from a low base. - Private sector wages rose faster than CPI in 2022H1; two-year ahead inflation expectations have risen to considerably above the central bank’s 3 percent target. - Monetary policy: Bank of Albania stopped unlimited liquidity provision in February and raised the policy rate in five steps from 0.5 percent to 2.75 percent in November. - Credit: private credit growth remains strong, driven by FX credit growth and increasing FX deposits from large FX inflows (tourism, FDI, remittances). - 2022 budget: expected to narrow considerably due to robust revenue and spending under-execution; government posted an overall surplus in the first three quarters of the year. - Targeted support to the most vulnerable totaled 0.6 percent of GDP cumulatively. - Broad subsidies for electricity SOEs totaled 1 percent of GDP in revisions. - Primary deficit projected to halve to 1.3 percent of GDP. - Public debt projected to decline further to just under 70 percent of GDP. - Financing conditions: yields on domestic government bonds have continued to rise; many local bond auctions undersubscribed amid heightened uncertainty and rising inflation; government reluctance to accept higher interest rates contributed to under-subscription. - External: despite a negative terms of trade shock, current account expected to remain broadly stable in 2022 supported by tourism. Reserves about €5 billion at end-October (around 200 percent ARA metric). - Lek experienced brief volatility in March; modest FX intervention calmed markets and lek/euro has slightly appreciated since. ### OUTLOOK AND RISKS - Staff projections: - Real GDP projected to grow by 3.7 percent in 2022 (strong activity through Q3 more than compensating for expected deceleration in Q4). - Growth forecast to slow to 2.2 percent in 2023 due to tighter financial conditions, slowdown in Europe, and withdrawal of policy support. - Headline inflation expected to peak in coming months and start receding in 2023, returning to the BoA’s 3 percent target by mid-2024. - Staff assumes policy rate will reach 3–3.5 percent in 2022 and 4–4.5 percent in 2023. - Core inflation expected to peak in 2023. - Growth expected to converge to potential of 3.4 percent over the medium-term. - Key risks (tilted to the downside; Annex II): - Further increases in food and energy prices, potentially triggering larger second-round effects and social unrest. - Higher and more persistent inflation weighing on real income and growth. - More significant tightening in global financial conditions hampering access to external market financing. - Vulnerability to unfavorable weather conditions and a reversal in real estate prices given the sector’s growing contribution and banks’ rising exposure to the sector. - Mitigating factor: high level of FX reserves. ### BOX 1 — Russia’s War Against Ukraine: Albania’s Exposure and Responses - Overall: limited direct exposures; main impacts via higher food and energy prices, tighter financing conditions, and lower demand from EU trading partners. - Trade: low trade exposures to Russia and Ukraine compared to other Western Balkans; Albania secured uninterrupted supplies of seed oil, cereals, and fertilizers albeit at higher prices. - Tourism: dependence on tourism, but small share of tourists from Russia and Ukraine; 2022 was best tourism season on record, surpassing 2019. - Energy: Albania does not use natural gas and generates electricity entirely from hydropower; unfavorable weather can create energy shortfalls. A total Russian gas shut off could affect Albania through sharply higher prices for imported electricity. - Financial sector: Albania imposed sanctions on Russia and Belarus; no Russian bank operates in Albania; some foreign-owned banks have exposures to Russia but are standalone subsidiaries and have remained stable and liquid. - Investment: no reported inward or outward FDI from Russia and Ukraine; portfolio investments in Russian and Ukrainian assets negligible. - Policy responses: - 2022 Budget amended twice (March and July) to provide targeted support of 0.6 percent of GDP for vulnerable groups; government increased minimum wage from ALL 30,000 to ALL 34,000. - Electricity tariffs kept unchanged for households and most small businesses through untargeted subsidies to electricity SOEs in 2022 totaling 1.3 percent of GDP. - Authorities considering complementing broad subsidies with a temporary higher block tariff for high-consumption households. ### AUTHORITIES’ VIEWS - Authorities broadly share staff’s assessment on outlook and risks and emphasize the unusually large uncertainty. - They highlight the importance of preparing alternative scenarios. - Weather conditions have considerable impact on growth, fiscal deficit, and energy security due to reliance on hydropower. - Bank of Albania sees high inflation as a main threat to macroeconomic stability and long-term growth prospects. ### POLICY DISCUSSIONS — Main Staff Recommendations - Rebuild fiscal policy buffers faster underpinned by revenue mobilization to reduce pressure on monetary policy to tighten and to facilitate external adjustment and market confidence. - Monetary policy normalization is appropriate; supervision should follow rising bank lending (notably FX lending) and real estate-related activities, and take actions to rein in excessive risk taking. - Efforts should continue to raise bank capital buffers. - Accelerate structural reforms to lift potential for sustainable, inclusive, and green growth. *IMF staff report (2022) — Albania: Article IV mission materials and analysis as presented in the provided content.* ### 12. The draft 2023 Budget rightly aims for further consolidation, but optimistic ### 12. The draft 2023 Budget rightly aims for further consolidation, but optimistic ### Fiscal outlook and 2023 budget assessment - The budget targets a small primary surplus, thus adhering to the fiscal rule one year ahead of the deadline stipulated by the Organic Budget Law. - Revenue measures planned: amendments to reduce the loophole for free professionals in the Income Tax Law and a one-off windfall tax imposed on independent power producers. - Staff view: limited permanent gains expected from these measures and budget revenue projections are considered optimistic. - Planned spending highlights: - Further transfers to the electricity sector SOEs to keep tariffs unchanged for households and most businesses: 0.6 percent of GDP. - Sizable capital spending: 5.5 percent of GDP. - Staff baseline projection for 2023: zero primary balance, reflecting more modest revenue gains and expected spending under-execution, especially with capex. - Government plan to issue a Eurobond in 2023 is subject to considerable uncertainty; even with reduced access to international markets, financing could be achieved with official external loans and grants, domestic borrowing, and use of the SDR allocation as needed. ### Medium-term fiscal outlook and debt trajectory - Fiscal position: expected to stabilize as spending reverts to pre-pandemic norms and the fiscal rule is upheld. - Projection: a small primary surplus from 2024 and beyond as crisis-related spending is phased out. - Public debt ratio: expected to decline to under 64 percent of GDP by 2027. - Gross financing needs (GFNs) will remain sizeable; with higher borrowing costs, interest payments will consume an increasing share of tax revenue. ### Policy recommendations on consolidation and fiscal stance - Staff recommended a more ambitious revenue-based consolidation path to rebuild policy room faster, reduce demand pressure, and mitigate rising borrowing costs. - Specific recommendations: - The 2023 budget deficit target is in line with staff’s recommendation. Given prospect of elevated inflation in 2023, the government should raise more tax revenue through coherent measures (¶15) and reprioritize spending to create room for higher targeted and temporary support to the vulnerable without increasing the deficit target. - Beyond 2023, aim for a primary surplus of 1.5 percent of GDP in 2024 (Text Table 1), mainly through tax policy measures based on a sound Medium-Term Revenue Strategy (MTRS) (¶15 and Text Table 2). The size of fiscal adjustment needed to achieve this goal would be comparable to that envisaged for 2023 under the baseline. If downside risks materialize, allow automatic stabilizers to operate and deploy further temporary, targeted support to the vulnerable. - After efficiency and transparency of public spending improve, consider a lower primary surplus of about 1 percent of GDP starting in 2026, provided fiscal risks are in check, prioritizing human development needs and green transition and addressing large infrastructure needs. ### Medium-Term Revenue Strategy (MTRS) and revenue measures - The MTRS is the cornerstone of credible fiscal consolidation and should be finalized and implemented as a cohesive strategy without further delay. - Albania’s tax revenue as a share of GDP remains among the lowest in the region; higher revenue is needed to reduce debt while supporting development needs. - Within the MTRS, outstanding indirect tax measures could be postponed until inflationary pressures subside, but direct taxation and revenue administration measures to broaden the tax base and reduce distortions should not be deferred. - Staff concern: proposed tax amnesty law poses money laundering and governance risks and may adversely affect tax compliance. Key quantified menu of measures and expected yields (as presented): - Tax policy 1.4–1.7* - Indirect Taxes 0.80 - VAT (starting in 2024, including measures to end exemptions for health, education and financial services; extend coverage to first sale of new residential apartments; review VAT registration threshold) 0.65 - Excise (starting in 2024, including measures to unify tariffs on beer and wine products and remove some key excise exemptions) 0.15 - Direct Taxes 0.6–0.9* - Income taxes (starting in 2023, including measures to bring self-employed professionals under the PIT, remove zero tax bracket for PIT and CIT, make PIT tax brackets and rates more progressive, and introduce simplified turnover-based regime for SMEs) 0.3–0.6* - National and Local Taxes and Tariffs (starting in 2023, property tax and gambling reforms) 0.3 - Revenue administration 0.7 - Tax Administration (starting immediately, to increase VAT compliance in construction, and address "high-risk" non-compliant sectors and high informality) 0.45 - Customs Administration (starting immediately to increase compliance on excise duty on fuels, modernize business processes, and improve risk-based enforcement) 0.25 - TOTAL** 2.1–2.4* Notes in source: - *Higher end of the range reflects potential additional gains from removing the zero tax bracket for CIT and PIT for those with an annual turnover above ALL 14 million. - **Estimated revenue gains from the 2023 Budget measures that have been incorporated into the baseline (0.3 percent of GDP) reflect the implementation of a few elements related to the MTRS. ### Social protection - Strengthening social protection can enhance crisis management by enabling more effective and targeted fiscal support. - Short-term: room to better leverage existing structures and programs to improve targeting and coverage beyond current beneficiaries. - Medium-term: update and scale up the existing cash transfer framework and regularly review adequacy and delivery of benefits to improve targeting, effectiveness, and reach during future shocks. - Ongoing work: Social Assistance Modernization Project with IBRD support. ### Electricity sector, SOEs, and fiscal risks - Urgent reforms needed to bring the electricity sector to financial viability and reduce fiscal risks. - Broad-based subsidies should be removed because they disproportionately benefit better-off households and distort price signals. - Gradual tariff adjustments to cost recovery levels are critical and must be complemented with measures to support the vulnerable. - Critical to enhance electricity sector transparency and strengthen corporate governance in SOEs. - The government plans transfers to electricity SOEs equivalent to 0.6 percent of GDP to keep tariffs unchanged for households and most businesses. ### Public investment management and PPPs - PIM needs strengthening; many recommendations from the 2016 PIMA remain outstanding. - No meaningful changes to the legal framework; PPP decisions (estimated at about 40 percent of 2022 GDP reflecting contract value of existing projects and pipeline) continue to be made outside the budgetary process. - Framework for coordinating and managing PPPs suffers important weaknesses; extent of related fiscal risks unclear. - Authorities should strengthen MOFE capacity to act as effective gatekeeper in project selection, evaluation, and monitoring; align PPP and PIM processes fully into the normal budget cycle. ### Fiscal transparency, arrears, and fiscal risk management - Call for strengthening fiscal transparency and credibility: all public investment projects should be subject to public investment and procurement frameworks. - Authorities urged to publish public procurement contracts pertaining to pandemic and earthquake recovery spending, names of awarded companies, and beneficial owners. - Minimize use of normative acts to alter the budget. - Reporting and analysis of fiscal risks (including SOE liabilities) should be more forward-looking; need mechanism for systematic monitoring and follow-through on repayment of government on-lending to SOEs. - Conditions for on-lending and guarantees to SOEs and municipalities should be made more stringent. - Arrears persist, particularly related to investment projects and court cases; improve data traceability and automation on arrears. - Third PFM Strategy expected to be finalized in 2023; should address incomplete reforms, setbacks in commitment controls and arrears prevention, and incorporate green PFM practices. - Fiscal Risk Unit: mandate and staffing should be progressively strengthened over the medium term. ### Cash and debt management - Effective cash and debt management is crucial amid tougher financing conditions and large gross financing needs with a sizable share of external debt and large bullet repayments. - Improvements: better coordination between MOFE and BoA; BoA regularly attends Committee on the Management of Debt and Liquidity; revised agreement expands MOFE’s cash management toolbox for foreign currencies. - Continued effective implementation of the latest debt management strategy is important. ### Authorities’ views on fiscal reforms - Authorities reaffirm commitment to fiscal consolidation, highlight challenges in implementing major reforms amid consecutive large shocks. - Emphasize close coordination of fiscal and monetary policy. - Acknowledge downside risks to 2023 revenue projections and will prioritize spending to achieve budget target if revenues fall short. - Commit to MTRS and ongoing efforts to improve revenue administration, but expect limited benefits in the current environment. - Work underway on Social Assistance Modernization Project with IBRD support. - On PPPs, increasing reliance on cost-benefit analysis; MOFE notes more difficult financing environment gives it more leeway to act as gatekeeper. - Third PFM Strategy: authorities seek Fund assistance for drafting and costing; highlight high staff turnover as obstacle to TA absorption. ### Monetary policy and inflation (Reducing Inflation) - Monetary policy should continue to normalize; real policy rates remain negative despite five consecutive policy rate increases due to rising underlying inflation and inflation expectations. - With upside risks to inflation and strong inflation persistence, further policy rate increases are warranted. - BoA should be prepared to raise the policy rate to above its estimated neutral rate of 4.5–5 percent if inflationary pressure does not abate. - Monetary transmission is limited by euroization and relatively low bank credit penetration, despite predominance of variable-rate loans. - Pace and timing of tightening should consider evolving conditions: - Stronger tightening required if international commodity prices rise and risk second-round effects. - Slower growth, faster fiscal consolidation, or strong core inflation response to policy rate increases would support a more gradual tightening or earlier pause. - Sizable exchange rate movements would affect required policy response. - Exchange rate policy: remain flexible and act as shock absorber; FX interventions reserved for disorderly conditions, mitigating large depreciations’ balance-sheet effects, and modest pre-announced FX purchases. - Authorities should be ready to take further measures if BoP pressures and financial stability concerns rise. Authorities’ views on monetary policy: - BoA agrees on need for decisive, data-driven rate increases and expects more rate hikes in the near term under its baseline projections. - BoA aims to communicate policy decisions and strategy clearly; assesses transmission mechanism as sufficiently effective to allow convergence of inflation to the target in 2024, aided by ECB tightening. ### Financial stability - Banking system has weathered successive shocks relatively well, supported by BoA regulation and supervision, but pockets of vulnerabilities exist. - Asset quality: Net NPL ratio reached its lowest level of 5.1 percent in September. - Capitalization above regulatory requirements, though one large bank has yet to meet increased macroprudential capital buffer requirements. - Banking system susceptibilities: credit, exchange rate, and interest rate risks due to large unhedged FX loans (a quarter of total loans), prevalence of variable interest rate loans, and large holdings of government bonds. Key selected financial stability indicators (as presented): - Regulatory capital to risk-weighted assets: 18.7 18.7 18.7 18.5 19.3 - Tier 1 capital to risk-weighted assets: 17.4 17.5 17.6 17.4 18.1 - Shareholders' equity as a percent of total assets: 10.1 10.5 10.4 9.9 10.2 - Net NPLs to regulatory capital: 15.5 13.6 11.3 7.1 6.7 - Gross NPLs to total loans: 11.1 8.4 8.1 5.6 5.1 - ROE (annual basis): 13.0 13.5 10.7 12.9 9.4 - ROA (annual basis): 1.3 1.4 1.1 1.3 1.0 - Liquid assets to total assets: 34.2 35.7 34.8 33.3 28.9 - Liquid assets to short-term liabilities (<1Y): 46.2 49.4 47.4 45.4 40.0 - Private sector credit growth: -0.9 6.1 8.9 8.6 11.1 - Bank deposits growth: -1.3 3.9 8.3 9.3 6.7 *Source: IMF staff summary of the chapter.* ### 28. Enhanced vigilance will be key to identify and deal with financial stability risks ### 28. Enhanced vigilance will be key to identify and deal with financial stability risks ### Financial stability risks and supervision - Enhanced vigilance is needed to identify and deal with financial stability risks preemptively, particularly as monetary conditions tighten. - The full impact of consecutive shocks since 2019 may only become visible on bank balance sheets over time. - Staff analysis shows that the credit-to-GDP gap is still negative, but this mechanical measure should not be overemphasized. - Close monitoring and management of potential risks from the sizable credit growth since 2019, including rising FX lending, is warranted. - The BoA needs to continue to enhance risk-based on-site and off-site inspections and complete focused asset quality reviews (AQRs). - Staff support the BoA’s ongoing efforts to strengthen bank capital buffers, including through further phase-in of macroprudential and MREL (Minimum Requirement for Own Funds and Eligible Liabilities) capital requirements, and to enhance its capacity to challenge banks’ capital projections, given the expected adoption of IFRS 9 standards by end-2023. ### Banking system structure, ownership, and supervisory vigilance - Number of banks has fallen to 11 from 16 in 2016, reflecting consolidation and retrenchment of EU banks from the region. - Presence of banks with significant shareholding by individuals and non-financial groups raises the risk of capital shortfalls, related-party transactions, and large exposures. - Ensuring market entrants meet fit and proper criteria on an ongoing basis (including significant shareholders and controllers, beneficial owners, and senior managers) will be critical. - BoA should implement enhanced bank licensing and supervisory framework and authorities should apply pertinent competition rules. ### Regulatory alignment, insolvency, and NPL preparedness - Improving supervisory and regulatory frameworks, aligned with EU standards, would provide authorities with better tools to monitor and manage financial stability risks. - BoA has made progress towards achieving equivalence with EU standards and expects to open discussions of equivalence with the European Banking Authority in 2023. - To prepare for any large increases in NPLs, actions beyond the BoA's remit should be stepped up to implement swiftly the insolvency and resolution frameworks already in force, including out-of-court loan restructuring. - The long-standing impasse in bailiff reform should be resolved. ### Non-bank financial sector monitoring - Non-bank assets are equivalent to 10 percent of GDP, one-tenth of the banking sector. - Small size of investment funds and limited interlinkages have meant large redemptions this year, triggered by the rise of government bond yields, have not led to large downward pressure on Albania's sovereign bond market. - The Albanian Financial Supervisory Authority (AFSA) should continue to enhance data collection, risk monitoring, and expand its liquidity management toolkit for investment funds. - Following adoption of a virtual asset regulation in 2021, AFSA has strengthened cooperation with international peers, including participating in IOSCO's Fintech Taskforce; to date no entity has applied for a license to carry out virtual asset activities under AFSA's supervision. ### Real estate, construction, and data gaps - The real estate and construction sector is becoming an important conduit for macro-financial linkages due to rising contribution to economic activities and increasing financing from banks and foreign flows. - BoA's surveys point to rapid growth of real estate prices. - Significant data gaps on real estate and construction prevent timely monitoring and identification of potential risks despite BoA's recent efforts. - BoA has collected yearly data to compute loan-to-value, loan-service-to-income, and loan-to-income indicators from an ad hoc report from banks. - BoA updated stress testing methodology in line with best practices and has completed focused AQR for 6 banks. - BoA is working on a document to provide a legal basis for unified definitions on lending and mortgage indicators based on the European Systemic Risk Board’s recommendations. ### Authorities’ views on banking sector and reforms - BoA sees the banking sector as sound, liquid, and well-capitalized and notes reforms have improved stability and efficiency. - BoA interprets sizable credit growth and increase in portfolio quality as contributions to economic recovery. - Banks now face higher interest rate conditions after years of declining and low rates. - BoA is committed to enhancing regulation and supervision and to promote financial stability, including improving stress testing and completing AQRs. ### Post Financing Assessment (PFA) and capacity to repay the Fund - Fund credit outstanding was 247.3 percent of quota (8.6 percent of gross international reserves) at end-2021 and will decline to 211.9 percent of quota at end-2022. - Debt service to the Fund is projected to peak in 2024 at 3 percent of gross international reserves. - Albania’s international reserves are projected to remain adequate in the medium term at around 170 percent of the ARA metric by 2027. - Net international investment position is expected to remain stable at around -50 percent of GDP in 2022. - Public debt is sustainable but high; GFNs are projected to average 17 percent of GDP in the medium term. - Key vulnerabilities: (i) rollover risks; (ii) higher borrowing costs and reduced access to external market financing amid tighter global financial conditions; (iii) exchange rate risks due to sizeable share of foreign currency-denominated debt. - March 2022: BoA’s repo line of €400 million with the ECB was extended to January 2023. - Staff does not recommend an extension of the PFA after Albania’s fund credit outstanding falls below the threshold of 200 percent of quota in February 2023. - A 2022 update safeguards assessment found that the Bank of Albania has a relatively robust safeguards framework; progress made on recommendations to enhance internal audit independence and strengthen legal framework. ### Fiscal vulnerabilities and policy recommendations - With tighter financing conditions and heightened uncertainty, reducing fiscal vulnerabilities and rebuilding fiscal room fast are critical to risk mitigation. - Implementing an ambitious fiscal consolidation underpinned by a sound MTRS remains the main way forward to rebuild policy buffers, preserve market confidence, and reduce external vulnerabilities. - A quarter of banks’ assets are held in government bonds; fiscal consolidation would help preserve financial stability. - Staff calls for a primary surplus of 1.5 percent of GDP in 2024, mainly through revenue measures based on a sound MTRS. - For 2023, the government needs to raise more tax revenue through coherent measures and reprioritize spending to create room for higher targeted support while staying within the budget target. - Broad-based subsidies should be avoided; fiscal support needs to be temporary and targeted to the vulnerable, fully leveraging the existing social protection framework. ### Staff appraisal and macroeconomic outlook - Staff projects economic growth of 3.7 percent in 2022, supported by tourism, real estate, and services, before slowing to 2.2 percent in 2023 due to tighter financial conditions, slowdown in Europe, and withdrawal of policy support. - Inflation has risen sharply and become increasingly broad-based. - Outlook is subject to considerable uncertainty with risks tilted to the downside, including volatile commodity prices, more significant tightening of financial conditions, and unfavorable weather conditions. *IMF staff summary of chapter: Enhanced vigilance will be key to identify and deal with financial stability risks.* ### 51. Fiscal structural reforms remain crucial for ensuring fiscal sustainability, credibility, ### Fiscal structural reforms remain crucial for ensuring fiscal sustainability, credibility, and transparency ### Fiscal structural reforms and public investment - Finalize and implement the MTRS, serving as a cohesive strategy for tax reforms, without further delay. - Align the PPP and PIM frameworks, with full integration into the normal budget cycle. - Subject all public investment projects to the public investment and procurement frameworks. - Step up efforts to ensure sustained progress in improving PFM and strengthening fiscal risk monitoring, assessment, and management. - Address electricity sector financial viability urgently to reduce fiscal risks given volatility in the global energy market. ### Monetary policy guidance - Monetary policy should continue to normalize while being nimble and data driven. - Staff supports the increase in policy interest rates undertaken by the BoA. - With still accommodative monetary conditions and upside risks to the inflation outlook: - Further interest rate increases are warranted in the short-term to prevent a wage-price spiral and reduce the risk of inflation expectations becoming unanchored. - The BoA needs to be prepared to raise the policy rate to above its estimated neutral rate if inflationary pressures do not abate. - Given high uncertainty, the pace and timing of the tightening cycle need to consider evolving economic conditions. ### Financial stability vigilance and supervision - Enhanced vigilance is vital as monetary conditions tighten and the financial landscape changes. - The banking system has weathered shocks relatively well, supported by the BoA’s efforts to enhance regulation and supervision, but: - The full impact of shocks may only become visible after some time. - Banks are susceptible to credit, interest rate, and exchange rate risks. - Close monitoring and management of potential risks from sizable credit growth, including rising FX lending, are essential. - Enhance surveillance of the real estate and construction sector's impact on financial stability. - The BoA’s ongoing efforts to enhance bank capital buffers are welcome. - Improving regulatory and supervisory frameworks, aligned with EU standards, would provide tools to better monitor and manage financial stability risks. - The presence of banks with significant shareholding by individuals and non-financial groups raises risks of capital shortfalls, related-party transactions, and large exposures. - Ensuring the fit and proper status of market participants on an ongoing basis to operate in the Albanian financial system will be critical. ### Structural reforms, labor, and revenue mobilization - Steadfast progress is required to address long-standing structural issues, supported by revenue mobilization efforts. - Progress in judicial reforms and combating corruption is welcome; further efforts are warranted. - Expedite efforts to exit FATF’s grey list and continue to reaffirm commitment to a robust AML/CFT framework. - A declining and aging labor force is weighing down Albania’s growth potential. - Strengthening the rule of law and institutions and fighting informality will help stem emigration. - The macrocriticality of climate change calls for concerted adaptation efforts. - Revenue mobilization, underpinned by a sound MTRS, will be needed to support Albania’s structural reform agenda. ### IMF repayment capacity and PFA recommendation - Albania’s capacity to repay the Fund is adequate and risks to it remain contained and manageable. - Staff does not recommend an extension of the PFA after Albania’s Fund credit outstanding falls below the threshold of 200 percent of quota in February 2023. *Source: IMF country report excerpt.* ### 56. It is recommended that the next Article IV consultation be held on the standard 12- ### 1albea2022004 - 56. It is recommended that the next Article IV consultation be held on the standard 12- ### Real sector developments - Real GDP growth rebounded strongly in 2021. - Recovery supported by tourism and construction and buoyant domestic demand. - Real GDP is projected to remain 3.9 percent below the pre-pandemic forecast by 2025. - Albania continues to lag EU countries in living standards. - Selected quantitative indicators and projections (from figures and Table 1): - Real GDP: 2018: 4.0; 2019: 2.1; 2020: -3.5; 2021: 8.5; 2022: 3.7; 2023: 2.2; 2024: 3.3; 2025: 3.4; 2026: 3.4; 2027: 3.4 - Domestic demand contribution: 2018: 3.9; 2019: 2.1; 2020: -3.4; 2021: 9.3; 2022: 2.1; 2023: 2.8; 2024: 3.6; 2025: 3.9; 2026: 4.0; 2027: 3.8 - Consumer Price Index (eop): 2018: 1.8; 2019: 1.1; 2020: 1.1; 2021: 3.7; 2022: 9.0; 2023: 3.9; 2024: 3.0; 2025: 3.0; 2026: 3.0; 2027: 3.0 - Real GDP growth per capita: 2018: 4.1; 2019: 2.2; 2020: -3.4; 2021: 8.7; 2022: 4.0; 2023: 2.5; 2024: 3.7; 2025: 3.7; 2026: 3.8; 2027: 3.8 ### Labor market developments - Employment and labor force participation have recovered to above pre-pandemic levels. - Recovery driven by a strong pickup in demand in trade, manufacturing, construction, education, and health. - Formal employment in tourism has recovered more slowly. - Job vacancies have started to rise. - Population decline driven by emigration and population aging is partly reflected in labor market dynamics. - Informality remains a key feature of the Albanian economy. - Quantitative indicators: - Labor force participation rate and employment rate series shown for 2018Q1–2022Q2 (chart data). - Job vacancies, 2012Q1–2021Q4 (chart series). - Net Birth, Net migration, Population growth series (chart data; net migration negative in years shown). - Employment growth by sector chart compares 2019Q3 vs. 2021Q4. ### Fiscal sector developments - Fiscal consolidation started in 2021 with the economic rebound, driven by rising revenue and spending under-execution. - The stock of public debt remains high and gross financing needs are large. - Recent increases in the monetary policy rate have been reflected in higher government bond yields across maturities and higher sovereign spreads since the start of the war in Ukraine. - Key fiscal figures (Table 1 and Table 2a/2b): - Total revenue and grants (percent of GDP): 2018: 27.5; 2019: 27.2; 2020: 25.9; 2021: 27.0; 2022: 27.6; 2023: 27.6; 2024: 27.4; 2025: 27.4; 2026: 27.4; 2027: 27.5 - Total expenditure (percent of GDP): 2018: 29.1; 2019: 29.2; 2020: 32.6; 2021: 31.6; 2022: 30.9; 2023: 30.3; 2024: 30.0; 2025: 30.2; 2026: 30.2; 2027: 30.2 - Overall balance (percent of GDP): 2018: -1.6; 2019: -1.9; 2020: -6.7; 2021: -4.5; 2022: -3.3; 2023: -2.7; 2024: -2.5; 2025: -2.7; 2026: -2.8; 2027: -2.8 - Primary balance (percent of GDP): 2018: 0.6; 2019: 0.1; 2020: -4.6; 2021: -2.6; 2022: -1.3; 2023: 0.0; 2024: 0.3; 2025: 0.3; 2026: 0.3; 2027: 0.3 - General government debt (percent of GDP): 2018: 69.5; 2019: 67.4; 2020: 75.9; 2021: 73.9; 2022: 68.5; 2023: 67.9; 2024: 66.4; 2025: 64.7; 2026: 64.5; 2027: 63.6 - Gross borrowing (billions of Leks, Table 2b): 2018: 98.8; 2019: 93.7; 2020: 121.4; 2021: 137.2; 2022: 35.9; 2023: 116.9; 2024: 105.7; 2025: 23.2; 2026: 115.6; 2027: 86.7 ### Inflation developments - Headline inflation reached its highest level in 24 years, driven by food and energy prices. - Albania’s inflation has remained lower than in many other European countries, partly reflecting regulated electricity tariffs. - Two-year ahead inflation expectations have risen to above the central bank’s target; wages and producer price indexes are rising. - Quantities and indices (figures and Table 1): - Headline inflation (avg and eop series): CPI (eop) 2022: 9.0 percent. - Average wage and minimum wage series shown alongside headline inflation (chart series). - Producer Price Index (Total, Domestic PPI, Exporter PPI) rising (chart series). ### Monetary developments - Bank of Albania (BoA) has started to raise the policy rate from a historically low level, but real policy rates remain low and negative. - Rise in spread between lek and euro bank lending rates has accelerated a shift toward more FX loans. - Deposits in FX surpassed those in lek starting from August 2022; Albania remains highly euroized in the region. - Selected monetary figures: - Broad money growth (percent change): 2018: -0.2; 2019: 4.3; 2020: 10.5; 2021: 8.6; 2022: 6.4; 2023: 5.6; 2024: 5.6; 2025: 5.3; 2026: 5.4; 2027: 5.3 - Private credit growth (percent change): 2018: -0.9; 2019: 6.1; 2020: 8.9; 2021: 8.6; 2022: 9.9; 2023: 5.7; 2024: 5.6; 2025: 5.3; 2026: 5.3; 2027: 5.2 - FX deposits / total deposits: 2018 (share) shown in chart; foreign currency deposits/total deposits (Table 4a memorandum): 2018: 53.9; 2019: 54.6; 2020: 53.5; 2021: 54.6; 2022: 56.1; 2023: 55.6; 2024: 55.1; 2025: 54.6; 2026: 54.1; 2027: 53.6 - Gross reserves (millions of euros; Table 3a): 2018: 3,399; 2019: 3,360; 2020: 3,942; 2021: 4,972; 2022: 5,061; 2023: 5,351; 2024: 5,163; 2025: 5,228; 2026: 5,570; 2027: 5,566 ### External sector developments - Higher commodity prices since late-2021 led to jumps in the value of exports and imports. - Current account deficit expected to be broadly stable in 2022 despite a negative terms-of-trade shock from higher commodity prices. - FX reserves remain at historical highs; lek appreciated in 2022 but the real effective exchange rate remained broadly stable. - Balance of payments and external indicators (Table 3a/3b): - Current account (percent of GDP): 2018: -6.8; 2019: -7.6; 2020: -8.7; 2021: -7.7; 2022: -7.8; 2023: -7.7; 2024: -7.6; 2025: -7.6; 2026: -7.5; 2027: -7.4 - Goods (fob) exports (percent of GDP): 2018: 7.7; 2019: 6.6; 2020: 6.0; 2021: 8.2; 2022: 8.8 - Goods (fob) imports (percent of GDP): 2018: 30.1; 2019: 29.4; 2020: 28.4; 2021: 33.0; 2022: 35.2 - Gross external debt (percent of GDP): 2018: 65.1; 2019: 60.0; 2020: 64.3; 2021: 63.1; 2022: 57.9; 2023: 57.9; 2024: 55.6; 2025: 55.5; 2026: 57.3; 2027: 57.1 ### Direct exposures to the war in Ukraine - Albania has limited direct exposure to Russia’s war in Ukraine with relatively small shares of total trade with both Russia and Ukraine. - Albania’s use of natural gas is very limited. - Imports from Russia and Ukraine include fuel, cereals, fertilizers, and seed oil. - Bilateral trade exposure (percent of total, 2020): - Export of Goods to Russia: 0.6 - Imports of Goods from Russia: 2.5 - Export of Goods to Ukraine: 0.2 - Imports of Goods from Ukraine: 0.5 - Tourist Arrivals from Russia: 0.2 - Tourist Arrivals from Ukraine: 0.7 - Main goods exports to Russia: Textile & Footwear - Main goods exports to Ukraine: Mineral Fuels, Fruit & Vegetables and other Foodstuff - Main goods imports from Russia: Mineral Fuels, Cereals, Iron and Sunflower oil - Main goods imports from Ukraine: Sunflower seeds & Oil, Iron & steel, and Cereals ### Banking sector developments - Nonperforming loans (NPLs) reached a historically low level in September and are converging to regional averages. - Capital ratios of the banking system are above regulatory requirements. - A large share of FX loans remains unhedged. - Ownership structure has shifted in recent years, reflecting retrenchment of EU banks from the region. - Banking system remains liquid but financial intermediation remains low in Albania. - Financial soundness indicators (Table 5, selected values): - Regulatory capital as percent of risk-weighted assets: Dec-14: 16.8; Dec-15: 15.8; Dec-16: 16.0; Dec-17: 17.0; Dec-18: 18.7; Dec-19: 18.7; Dec-20: 18.7; Dec-21: 18.5; Sep-22: 19.3 - Nonperforming loans (gross) as percent of total loans: Dec-14: 22.8; Dec-15: 18.2; Dec-16: 18.2; Dec-17: 13.2; Dec-18: 11.1; Dec-19: 8.4; Dec-20: 8.1; Dec-21: 5.6; Sep-22: 5.1 - Foreign currency-denominated loans to total loans: Dec-14: 62.4; Dec-15: 60.8; Dec-16: 58.6; Dec-17: 56.4; Dec-18: 56.1; Dec-19: 51.2; Dec-20: 50.3; Dec-21: 51.1; Sep-22: 51.5 ### Construction and real estate developments - Construction was a large contributor to GDP growth in 2021. - Household mortgages and business real estate loans have been increasing significantly since 2019. - Loans to nonfinancial corporations in construction and real estate services have grown; mortgage rates are rising. - A large share of unhedged FX loans is linked to real estate. - House prices index shows continuous acceleration in prices (Fischer Index, 2013=100; Whole Albania and Tirana series). ### Macroeconomic framework and key aggregates (selected figures from Table 1 / Tables 3–7) - Saving-investment balance: Foreign savings (percent of GDP): 2018: 6.8; 2019: 7.6; 2020: 8.7; 2021: 7.7; 2022: 7.8; 2023: 7.7; 2024: 7.6; 2025: 7.6; 2026: 7.5; 2027: 7.4 - Gross international reserves (billions of Euros, Table 1): 2018: 3.4; 2019: 3.4; 2020: 3.9; 2021: 5.0; 2022: 5.1; 2023: 5.4; 2024: 5.2; 2025: 5.2; 2026: 5.6; 2027: 5.6 - Indicators of capacity to repay the Fund (Table 6, millions of SDRs, as of October 31, 2022): - Fund repurchases and charges: 2021: 8.4; 2022: 9.3; 2023: 94.0; 2024: 120.7; 2025: 71.9; 2026: 22.1; 2027: 4.8 - Fund credit outstanding (end of period, in millions of SDRs): 2021: 344.4; 2022: 295.2; 2023: 211.1; 2024: 96.2; 2025: 6.2; 2026: 6.3; 2027: 4.8 - External financing requirement and sources (Table 7, millions of Euros): - Total financing requirement: 2018: 1,546; 2019: 1,123; 2020: 2,156; 2021: 2,181; 2022: 1,686; 2023: 2,280; 2024: 1,633; 2025: 2,360; 2026: 2,169; 2027: 2,492 - Total financing sources equal total financing requirement in projections for 2018–2027 (Table 7 provides breakdowns including foreign direct investment, official loans, commercial borrowing, commercial banks net, other investment, and errors and omissions). *Source: IMF staff report content as provided in the supplied PDF excerpts.* ### Annex I. Implementation of Past Article IV Recommendations ### Annex I. Implementation of Past Article IV Recommendations ### Fiscal Policy - Recommendation: Undertake a credible revenue-based fiscal consolidation to rebuild eroded policy buffers. - Finding: With growth and revenues over performing expectations in 2021, the overall deficit was reduced by 2.2 pp of GDP year on year (to 4.5 percent of GDP). - Recommendation: Ensure fiscal support is targeted and refrain from broad subsidies. - Finding: Following the war in Ukraine, the government adopted two packages totaling 2/3 per cent of GDP targeting low-income pensioners and other vulnerable groups. - Finding: A much larger subsidy of 1.3 per cent of GDP under the 2022 Budget for the electricity sector SOEs to prevent the pass-through of higher imported electricity costs to households and SMEs is broad-based. ### Structural Fiscal Reforms - Recommendation: Finalize and adopt a Medium-Term Revenue Strategy to underpin a revenue-based consolidation, with the aim to broaden the tax base, remove loopholes and raise revenue. - Finding: An updated draft of the MTRS was completed in 2022 but public consultations have been suspended following the war in Ukraine. - Finding: Some MTRS recommendations related to amendments to the Income Tax law and revenue administration are going ahead. - Recommendation: Bolster the credibility of the budget and fiscal framework by limiting the use of normative acts to amend the budget outside the regular budgetary cycle and return to adherence to the fiscal rule. - Finding: Due to the emergency created by the war in Ukraine, the use of normative acts to amend the budget continued in 2022. - Finding: The government remains committed to the fiscal rule and plans to achieve a small primary surplus in 2023, thus adhering to the fiscal rule one year ahead of the requirement stipulated by the Organic Budget Law. - Recommendation: Strengthen the Public Investment Management and Public Private Partnership framework, including by addressing outstanding recommendations from the 2016 PIMA and aligning the processes for PPP and budget-funded projects. - Finding: Despite the rising stock of PPPs and increasing domestically financed investment, there is no unified process aligned with the budget cycle that aims to maximize value for money. - Finding: Shortcomings to monitoring fiscal risks related with PPPs, guarantees, and other contingent liabilities persist. - Recommendation: Improve budget transparency by integrating earthquake reconstruction funds into the budget process. - Finding: Nearly 3 years after the earthquake, reconstruction spending continues to be treated in an ad hoc manner but new spending will be included in the regular budget process starting with the 2023 Budget. ### Monetary Policy and Financial Sector - Recommendation: Base monetary policy tightening on clear indications of broadening and persistent inflationary pressures. - Finding: As inflation has become increasingly broad based, the BoA has started monetary policy normalization. - Recommendation: Preserve exchange rate flexibility. - Finding: The exchange rate continues to act as a shock absorber, with the BoA intervening only once during a DMC episode in March 2022. - Recommendation: Closely monitor banks' loan portfolio quality and preserve capital buffers. - Finding: The BoA continues to conduct enhanced on- and off-site supervision of banks. - Finding: The BoA suspended the distribution of dividends for 2021 and 2022, rolling over a measure initially taken at the height of the Covid 19 pandemic. - Recommendation: Enhance surveillance of the fast-growing real estate market, including through data improvement. - Finding: Lack of reliable data prevents the BoA from properly monitoring the fast-paced growth in the real estate market and to develop related macroprudential tools. - Recommendation: Strengthen the monitoring of virtual assets and the communication with investors; enforce the framework within AFSA’s purview. - Finding: Some bylaws have been drafted with Fund TA, but more needs to be done to enhance supervision capacity. - Finding: So far no entity has applied for a license to carry out virtual asset activities under AFSA's supervision. ### Governance Reforms - Recommendation: Continue with the progress on judicial reform and efforts to combat anticorruption. - Finding: Ongoing progress in completing the vetting of judges and prosecutors. - Finding: The new justice institutions have been set up and there have been prosecutions of high-profile corruption cases. - Finding: Review of the anticorruption strategy has been completed and a new strategy and an action plan are expected by end-2022. - Recommendation: Strengthen AML/CFT framework, by implementing FATF recommendations to exit from the "grey list". - Finding: Progress has been made towards implementing FATF recommendations, but Albania remains on the grey list due to deficiencies in strategic areas. - Finding: The proposed tax amnesty initiative goes against the spirit of FAFT’s and MONEYVAL’s recommendations. *Annex I. Implementation of Past Article IV Recommendations* ### 6. Debt level under the baseline and alternative scenarios. Under the baseline scenario, ### 1albea2022004 - 6. Debt level under the baseline and alternative scenarios. Under the baseline scenario, ### Baseline projections - Gross debt is projected to decline gradually from a peak of 75.9 percent in 2020 to 63.6 percent of GDP in 2027. - Gross financing needs (GFNs) are projected to remain elevated, averaging about 17 percent of GDP annually between 2023 and 2027. - Interest payments account for 15-20 percent of GFNs, about two-thirds of which are due on domestic debt. - Large external repayments include amortization of Eurobonds and other commercial loans in 2025 and 2027, and repayments of new domestic borrowing starting 2024. ### Alternative scenarios (standardized) - Historical scenario (real GDP growth, the primary balance and real interest rates at the historical average of the past ten years): - Projects debt to remain at about 74 percent of GDP by 2027. - Constant-primary-balance scenario (primary deficit remains at the 2022 level of 1.3 percent of GDP): - Shows a debt ratio that would continue to increase to about 71 percent of GDP by 2027. ### Risks and vulnerabilities - Gross financing needs slightly breach the 15 percent threshold over the projection period. - Debt level and GFNs remain vulnerable to shocks to: - Growth - Primary balance - Real interest rates - Exchange rate - Contingent liabilities - Interest rate risks reflect large GFNs amid tighter financial conditions. - Exchange rate risks reflect the projected increase in foreign currency debt as a share of total debt. - Debt profile shows moderate risks related to the declining share of short-term debt but vulnerability to shocks arising from public debt holdings by non-residents. ### Stress tests and stochastic simulations — key outcomes - Real GDP shock: - Debt peaks at about 75 percent of GDP in 2024 and stabilizes at about 72 percent of GDP afterwards. - Combined shock: - Debt would rise and broadly stabilize at 82 percent of GDP by 2027. - Dual shock to real GDP growth and interest rate (assumptions over 2023–2027: (i) a decline in growth by 2 percentage points every year relative to the baseline, (ii) a decline in the revenue-to-GDP ratio by 2 ppts of GDP relative to the baseline, and (iii) an increase in interest rate by 25 basis points on average relative to the baseline): - Under this scenario, debt increases to about 81 percent of GDP by 2027. - Under asymmetric distribution of risks and adverse shocks: - There is a probability for debt to reach about 87 percent of GDP by 2027. - Sensitivity to fiscal stance and exchange rate shocks is less significant in the simulations, with public debt never exceeding 70 percent of GDP in those tests. ### External debt sustainability — projections and composition - External debt-to-GDP ratio is elevated but expected to decline gradually: - External debt rose to 63 percent of GDP in 2021 and is projected to decline gradually to around 57 percent of GDP by 2027. - External private debt stock is expected to remain broadly stable at about 30 percent of GDP. - FDI-related debt liabilities expected to continue as the largest component of private external debt; deposits held by Albanians living abroad the second largest component. - Public external debt composition and assumed operations: - Most external debt is held by multilateral creditors and bilateral development agencies; share of commercial debt expected to increase over the medium term. - Most foreign public debt is denominated in euros, followed by SDRs (IMF loans). - Assumed €500 million Eurobond issue in 2023. - A €250 million Eurobond buyback is expected in 2023 followed by a repayment of a similar amount at maturity in 2025. - External commercial debt as a percentage of total public sector debt expected to be broadly stable at ⅓ over the medium term. - External debt service: - Total public and private external debt service is expected to be around 14 percent in 2022 and to be around 23 percent in 2027 following a large amortization payment in 2027. ### External stress-test results - 30 percent exchange rate depreciation shock: - External debt would peak at 84 percent of GDP in 2023 before declining to 82 percent by 2027. - Shock to the current account of half a standard deviation (around 1 percent of GDP): - External debt would peak at 60 percent of GDP in 2026 before starting to decelerate in 2027. ### Selected quantitative highlights and assumptions (preserve exact values) - Gross debt: 75.9 percent (2020 peak) → 63.6 percent of GDP (2027). - GFNs: averaging about 17 percent of GDP annually between 2023 and 2027. - Interest payments: account for 15-20 percent of GFNs; about two-thirds are due on domestic debt. - Historical scenario debt by 2027: about 74 percent of GDP. - Constant-primary-balance scenario debt by 2027: about 71 percent of GDP. - Dual GDP-growth and interest-rate shock outcome: about 81 percent of GDP by 2027. - Adverse asymmetric shock tail: about 87 percent of GDP by 2027. - External debt: 63 percent of GDP (2021) → around 57 percent of GDP (2027). - External private debt stock: about 30 percent of GDP. - Assumed public Eurobond operations: €500 million issuance in 2023; €250 million buyback in 2023; repayment of similar amount in 2025. - External debt service: around 14 percent (2022) → around 23 percent (2027). - External debt commercial share of public sector debt: broadly stable at ⅓ over the medium term. - Stress-test assumptions (dual shock described): decline in growth by 2 percentage points every year; decline in revenue-to-GDP ratio by 2 ppts of GDP; increase in interest rate by 25 basis points on average (period 2023–2027). - IMF Recommended Fiscal Adjustment — Primary balance path (2022–2027): -1.3, 0.0, 1.5, 1.5, 1.0, 1.0 (in percent). *Source: IMF staff (Albania — Public Sector Debt Sustainability Analysis; as of October 17, 2022).* ### Annex III. Figure 7. Albania: External Debt Sustainability: Bound Tests 1/ 2/ ### Annex III. Figure 7. Albania: External Debt Sustainability: Bound Tests 1/ 2/ ### Figure description and methodology - External debt shown in percent of GDP. - Shaded areas represent actual data. - Individual shocks are permanent one-half standard deviation shocks. - Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown. - For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead. - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. - One-time real depreciation of 30 percent occurs in 2020. ### Key labeled values from the figure - Baseline external debt: 57 (percent of GDP). - Interest rate shock label: 58. - Historical label (in one panel): 59. - Real depreciation shock panel includes a 30 percent depreciation. - Combined shock panel label: 60. - CA shock panel label: 60. - Growth shock panel label: 60. - Combined (another panel) label: 60. - Gross financing need under baseline (noted as right scale) is displayed in the figure. ### Boxed average projections and historical averages (as shown in figure) - Box set A: Baseline: 0.9; Scenario: 1.3; Historical: 1.6. - Box set B: Baseline: 3.2; Scenario: 1.7; Historical: 2.5. - Box set C: Baseline: -7.1; Scenario: -7.7; Historical: -7.5. ### Notes on interpretation - The figure presents a set of bound tests illustrating how Albania’s external debt trajectory responds to shocks: interest rate shock, current account shock, growth shock, combined shocks, and a one-time large real depreciation. - The methodological notes indicate the use of permanent half-standard-deviation shocks for individual shock panels, and quarter-standard-deviation permanent shocks for the combined-sensitivity exercises noted in the explanatory text. - Historical scenario construction uses ten-year averages to project five years forward, enabling comparison of baseline projections with historical-average–based stress paths. *Source: International Monetary Fund staff (figure and notes as presented in "Annex III. Figure 7. Albania: External Debt Sustainability: Bound Tests 1/ 2/").* ### Annex VI. Box A1. Albania’s Energy Consumption ### Annex VI. Box A1. Albania’s Energy Consumption ### Overview - Energy use per capita in Albania is among the lowest in Europe. - In 2019, energy consumption per capita was at 0.8 ton of oil equivalent. - This level is "only one fifth of the EU average" and "50 percent of the world average." - The economy is dominated by consumption and services; most energy consumption is concentrated in transport and residential uses. - The collapse of heavy industries in the 90s reduced the energy intensity of the industry sector. - Agriculture contributes one-fifth of GDP but has a very limited share in energy consumption due to its low level of mechanization. - Albania produces heavy crude oil, which is almost wholly exported due to lack of capacity to refine, while domestic demand for oil is met mostly by imports. ### Energy consumption by sector (2019) - Industry: 15% - Transport: 34% - Commercial and Public Administration: 28% - Households: 19% - Agriculture: 3% - Fisheries: 1% ### Energy consumption by product (2019) - Crude oil: 61% - Electric power: 25% - Fire Wood: 8% - Lignite: 5% - Others: 1% - Natural Gas: 0% ### Natural gas, infrastructure, and diversification - Consumption of natural gas is "almost null." - Albania does not use natural gas either for industrial processes or for central heating. - The Trans-Adriatic Pipeline (TAP), a major gas pipeline project completed in 2020 that will bring gas from Azerbaijan to Italy, transits through Albania, but the country’s lack of a gas network limits immediate benefits and opportunities from a diversified source of energy. - In 2021, the government retroactively negotiated an exit point in Albania, which "could help with energy diversification sources in the future." *Source: Annex VI. Box A1. Albania’s Energy Consumption (from the supplied IMF country report content).* ### 2023. FATF also expressed concerns over the proposed fiscal amnesty law, which does not comply ### 1albea2022004 - 2023. FATF also expressed concerns over the proposed fiscal amnesty law, which does not comply ### FATF concerns and fiscal amnesty - "2023. FATF also expressed concerns over the proposed fiscal amnesty law, which does not comply with FATF’s best practices and principles for managing the AML/CFT implications of such programs." - Authorities acknowledge staff concerns and "will carefully consider all design features of the law and establish a strong monitoring capacity to minimize the risks of moral hazard, as well as of money laundering and terrorism financing." ### Technical assistance (TA) and resident representation - The Fund, other multilateral organizations, and donors have provided extensive technical assistance for institutional development in Albania; the Fund has sent multiple TA missions to Albania every year since 1991. - Resident Representative: "Ms. Eble from the regional office for the Western Balkans took her post on September 1, 2019 and oversees Albania’s local office." - TA since FY2016 covers multiple departments and purposes including: Tax Administration; Revenue Administration; Public Financial Management; Tax Policy; Fiscal Transparency Evaluation; Public Investment Management; Tax Law; NPL Resolution; AML/CFT measures related to VA and VASPs; IFRS 9 implementation and capital structure review; Regulatory Framework for Investment Funds; Central Bank Accounting; Banking Supervision and Regulation; Monetary Policy Design and Implementation; Crypto Asset Regulatory Framework; External Sector Statistics; Government Finance Statistics; National Accounts Statistics; Monetary and Financial Statistics. - Specific TA activities include nearly monthly Tax Administration visits in 2018 and multiple missions in 2021–2022 (including virtual (V) missions), and Public Financial Management missions across 2016–2022 (including many virtual missions). ### Relations with other international financial organizations - As of October 30, 2022, Albania collaborates with: - World Bank Group - European Bank for Reconstruction and Development (EBRD) - European Investment Bank (EIB) - Council of Europe Development Bank ### Statistical issues — Assessment of data adequacy for surveillance (As of October 30, 2022) - General: "Data provision has some shortcomings but is broadly adequate for surveillance." Main obstacles: real sector statistics and weak inter-institutional cooperation between government agencies. "Significant data gaps on real estate and construction activities" hinder assessment of macro-financial linkages. - National accounts: - Compilation improving and generally compliant with the System of National Accounts 2008 and ESA 2010. - Quarterly GDP estimates released with a lag of 90 days; first annual estimates published around 15 months after year-end. - Data are subject to large revisions; significant discrepancies between expenditure and production approaches. - INSTAT published non-financial institutional sector accounts for 2019. - Labor statistics: - Labor Force Survey (LFS) is "of insufficient quality." - Treatment of agricultural employment needs improvement; current LFS treats all individuals that own agricultural land as self-employed. - Lack of reliable income and wage indicators; poverty data available with a substantial lag. - Price statistics: - Compilation generally follows international standards. - Since December 2015, INSTAT updates CPI weights annually using a new national Household Budget Survey. - PPI, import price index, and construction cost indexes are published quarterly due to resource constraints. - Government finance statistics: - Fiscal source data adequate for broad presentation of quarterly fiscal operations in line with GFSM2014 and cover the entire general government. - Consistency across fiscal surveillance and other reporting improving; INSTAT producing reports from same compilation system since October 2021. - SECO-supported GFS capacity building helped develop procedures to estimate quarterly extrabudgetary flows and total accounts payable; procedures for compiling onlending data integrated. - Monetary and financial statistics: - Compilation framework conforms to MFSMCG methodology. - Data on the central bank, ODCs, and OFCs comprehensive and provided monthly (quarterly for OFCs). - Discrepancy between ROW data and ODC data remains due to inclusion of nonresident deposits with ODCs in monetary aggregates. - Bank of Albania reports key Financial Access Survey series including mobile/internet banking, mobile money, gender-disaggregated data, and UN SDG indicators (commercial bank branches per 100,000 adults and ATMs per 100,000 adults). - Financial sector surveillance: - Albania reports thirteen core and six additional FSIs for deposit-takers monthly to STA; six additional FSIs for OFCs and two FSIs for real estate markets also reported. - Coverage of FSIs for nonfinancial corporate sector may be improved. - "Significant data gaps on real estate and construction need to be addressed." - External sector statistics: - BoA compiles balance of payments and IIP with a time lag of less than 90 days; methodology based on BPM6 and ESA 2010. - Implementation of TA improved measurement of compensation of employees and remittances, facilitated compilation of quarterly IIP and supplementary IIP data and Reserves Data Template. - Albania participates in CPIS and CDIS. - Challenges remain in remittances, compensation of employees, and financial account transactions outside the banking system. ### Data standards and publication - Albania participates in the Enhanced General Data Dissemination System (e-GDDS) and publishes data on its National Summary Data Page since June 2017. - Data ROSC published in October 2006 (link provided in source). ### Table of Common Indicators Required for Surveillance (As of October 24, 2022) — selected items (dates preserved exactly) - Exchange Rates: Date of Latest Observation 10/24/2022; Date Received 10/24/2022; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - International Reserve Assets and Liabilities of the Monetary Authorities: Date of Latest Observation 09/30/2022; Date Received 10/24/2022; Frequency M M M. - Reserve/Base Money: 09/30/2022; 10/24/2022; M M M. - Broad Money: 09/30/2022; 10/24/2022; M M M. - Central Bank Balance Sheet: 09/30/2022; 10/24/2022; M M M. - Consolidated Balance Sheet of the Banking System: 09/30/2022; 10/24/2022; M M M. - Interest Rates: Date of Latest Observation 10/14/2022; Date Received 10/17/2022; Frequency M M M. - Consumer Price Index: 09/2022; 10/11/2022; M M M. - Revenue, Expenditure, Balance, and Composition of Financing — General Government: 2021; 09/28/2022; A A A. - Revenue, Expenditure, Balance, and Composition of Financing — Central Government: 2021; 09/28/2022; A A A. - Stocks of Central Government and Central Government-Guaranteed Debt: 2021; 09/28/2022; A A A. - External Current Account Balance: 2022 Q2; 09/14/2022; Q Q Q. - Exports and Imports of Goods and Services: 2022 Q2; 09/14/2022; Q Q Q. - GDP/GNP: 2022 Q2; 10/20/2022; Q Q Q. - Gross External Debt: 2022 Q3; 11/01/2022; Q Q Q. - International Investment position: 2022 Q2; 10/20/2022; Q Q Q. ### Statement by Mr. Federico Giammusso and Ms. Laura Cerami — key messages (December 7, 2022) - Outlook and risks: - "The Albanian economy grew by 8.5 per cent in 2021 and is projected to remain on a solid growth path of around 4 per cent this year and above 2 per cent in 2023." - "Inflation has risen to 8.3 per cent in October, driven by food and energy prices but increasingly broad-ba s e d." - Projected return of inflation to BOA target: "bring the inf lation back to the Bank of Albania (BOA)’s target of 3 per cent in 2024." - Authorities preparing contingency measures and "stand ready to reprioritize spending, use their 2021 SDR allocation, and seek external financing" in adverse scenarios. - Fiscal policy: - "The fiscal position improved significantly in 2021, with the deficit shrinking from 6 .7 to 4.5 per cent," (year implied 2021). - 2023 budget targets a primary balance, "meeting one year ahead the deadline established by the Organic Budget Law." - Planned 2023 measures include amendments to the Income Tax Law to broaden scope to self-employed professionals, a windfall tax on independent energy producers, reforms of the property tax and the gambling sector, and strengthening tax and customs administrations to increase VAT compliance in construction and high-risk sectors and on excise duty on fuels. - "The authorities have already implemented about 30 per cent of staff’s recommendations" from the TA developing a Medium Term Revenue Strategy (MTRS). - Authorities see merit in announcing a clear MTRS but favor "a more flexible approach to a revenue-d riv en f iscal consolidation" given uncertainty. - On spending: continued support to mitigate high energy prices through direct support to electricity sector SOEs; authorities acknowledge need for comprehensive electricity sector reform and consider staff recommendations on reducing inefficiencies and gradually raising tariffs to cost-recovery levels. - Authorities committed to advancing outstanding recommendations from the 2016 PIMA and strengthening PPP management; a new Public Financial Management Strategy is planned to be costed with Fund assistance next year. - Monetary and financial sector policies: - BOA ended provision of unlimited liquidity to banks in February 2022 and "gradually raising the policy interest rate from the historical low level of 0.5 per cent in March to 2.75 per cent in November." - With still negative real policy rates and persistent inflationary pressures, BOA "is prepared to further tighten its monetary policy stance." - BOA intervened in FX market after the Russian invasion of Ukraine; lek "has remained stable around its moderately appreciating trend against the euro, supported by FDI and remittances." - BOA committed to preserving exchange rate flexibility and limiting interventions to restore orderly markets and contain exceptional volatility. - Banking sector described as resilient with sound balance sheets and healthy credit growth; BOA will monitor risks in the growing real estate sector and conduct focused asset quality reviews and align frameworks with European standards. - Structural policies: - Top priorities: "Completing the judicial reform, strengthening the anticorruption and the AML/CFT frameworks, and reducing the still high informality." - Judicial vetting: "Around 70 per cent of judges have already been vetted, out of which more than two thirds have resigned or been dismissed or terminated"; vetting "is on track to meet the constitutional deadline of December 2024." - "The authorities have finalized a comprehensive National Anticorruption Strategy" and SPAK has initiated high-profile investigations and prosecutions. - "Most of the actions in the FATF’s Plan has been addressed and the authorities remain committed to its f ull implementation and achieve the exit f rom the grey list." - MTRS includes measures to reduce informality; authorities envisage a tax amnesty law to promote formalization but will consider design risks (see FATF concerns above). - Measures to encourage formal employment include the Youth Guarantee Program. - Climate and PFM/PIM: - Authorities appreciate staff analysis on climate risks, concur on urgency of mitigation and adaptation, and are constrained by limited resources. - They "would appreciate Fund’s advice to incorporate climate needs into their PFM and PIM frameworks" to facilitate access to concessional climate financing. - Post Financing Assessment: - Authorities welcome staff proposal "to terminate the Post Financing Assessment after Albania’s fund outstanding credit falls below the threshold of 200 per cent of quota in February." *IMF staff report content as provided in the source PDF.* ### 2023. Staff’s recommendation rests on the fully shared assessment that Albania capacity to ### 1albea2022004 - 2023. Staff’s recommendation rests on the fully shared assessment that Albania capacity to ### Staff assessment - 2023. Staff’s recommendation rests on the fully shared assessment that Albania capacity to repay the Fund remains adequate despite a more challenging external environment and heightened uncertainty. ### Authorities' commitments - The authorities are confident to maintain their strong repayment record and to this end are committed to rebuilding buffers and addressing f iscal vulnerabilities. *Source: 1albea2022004 - 2023. Staff’s recommendation rests on the fully shared assessment that Albania capacity to (PDF).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1albea2022004.pdf_