## 1albea2024001 - 3.6 percent in 2023 and 3.3 percent in 2024 led by resilient private consumption, with notable ## Source details **Canonical URL:** [1albea2024001 - 3.6 percent in 2023 and 3.3 percent in 2024 led by resilient private consumption, with notable](https://www.imf.org/-/media/files/publications/cr/2024/english/1albea2024001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1albea2024001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1albea2024001.pdf.json) --- ### Macroeconomic outlook and risks - Real GDP growth: - 2022: 4.8 percent - 2023: 3.6 percent - 2024: 3.3 percent - Convergence toward long-term potential growth of 3½ percent thereafter. - Growth drivers and composition: - Resilient private consumption. - Notable strength in tourism and construction activity. - Consumption growth expected to soften as monetary policy pass-through proceeds; tourism-fueled services activity and pipeline private and donor-funded FDI projects to support growth. - Inflation: - Inflation (average): 2022: 6.7 percent; 2023: 4.8 percent; 2024: 4.0 percent - Inflation (end-period): 2022: 7.4 percent; 2023: 3.8 percent; 2024: 3.6 percent - Current level hovers around 4 percent amid tight labor markets. - Expected to revert gradually to the 3 percent target by early 2025 (staff forecast; alternative BoA view: convergence by second half of 2024). - External position: - Current account (% GDP): 2022: -6.0; 2023: -3.5; 2024: -4.4 - NIIP: -43 percent of GDP by end-2022 (vs -50.5 percent end-2021). - Gross Assets: 57 percent of GDP (2022); Gross Liab.: 108 percent of GDP (2022); Debt Liab.: 43 percent of GDP (2022). - Gross international reserves (millions of euros): 2023: 5,329; 2024: 5,477; Reserves (months of imports): 2022: 6.9; 2023: 6.5; 2024: 6.1 - Exchange rate: - Lek appreciated steeply since Q4 2022; nominal exchange rate appreciated around 11 percent in first 11 months of 2023. - REER: panel/model estimates imply overvaluation in 2022 (various model gaps reported: REER Gap of 4.0–6.2 percent in source tables). - A flexible exchange rate is recommended as the first line of defense; FX interventions only in disorderly market conditions. - Major risks: - Heightened geopolitical tensions. - Vulnerabilities to weather-related energy sector shocks (hydropower reliance). - Risk of a sudden reversal of the exchange rate appreciation. - Risk of more persistent inflation. - Downside scenario shock drivers: recurrence of an energy crisis and supply disruptions, sharper-than-expected monetary tightening, abrupt global slowdown. ### Fiscal position, public debt, and recommended fiscal strategy - Fiscal indicators (percent of GDP): - Revenues: 2022: 26.8; 2023: 28.0; 2024: 27.4 - Expenditures: 2022: 30.4; 2023: 30.2; 2024: 29.9 - Fiscal balance: 2022: -3.7; 2023: -2.2; 2024: -2.5 - Primary balance: 2022: -1.8; 2023: 0.0; 2024: 0.2 - Public debt: 2022: 65.5; 2023: 61.1; 2024: 60.4 - Gross financing needs (GFN): elevated; average around 18 percent of GDP in 2023–28 (staff estimate). - Medium-term budget projections (selected): - Nominal GDP (billions of lek): 2023: 2,310; 2024: 2,475; 2025: 2,636; 2028: 3,192 - Overall balance: 2023: -2.2; 2024: -2.5; 2028: -3.5 - General Government Debt: 2023: 61.1; 2024: 60.4; 2028: 59.4 - Staff recommended fiscal adjustment: - Additional frontloaded cumulative net fiscal measures of around 1½ percent of GDP over next five years (frontloaded to 2024 and 2025). - Proposed composition: - Revenue mobilization: about 2 percent of GDP. - Efficiency gains: ½ percent of GDP. - Higher productive spending: 1¼ percent of GDP on public investment, education, and climate adaptation (conditional on improved PIM). - Rationale: bring public debt on a clear downward path, lower GFN and rollover risks to under 15 percent of GDP by 2028, and build fiscal space for countercyclical policy. - Public investment and PPPs: - PPPs value around one-third of GDP; unsolicited proposals account for four-fifths of existing PPP contracts. - Recommendations: operationalize PIM guidelines, strengthen PPP framework, eliminate unsolicited proposals, clarify MoFE gatekeeping role. - Fiscal risk management: - Prepare a standalone, comprehensive Fiscal Risk Statement starting in 2024 covering PPPs, contingent implicit and legal liabilities, and SOEs; expand Fiscal Risk Unit coverage of SOEs; operationalize SOE Health Check Tool. ### Revenue strategy and tax measures - Key tax-policy options and timing (as in source): - Ending exemption on private health and education services (2024). - Ending exemption on insurance services (2026). - Revising the VAT registration threshold (2026). - Removal of other exemptions from excise duty (2025). - Taxation scheme for self-employed professions (2024; measure already included in the baseline). - Expansion of categories of gambling (2024). - Expansion of environmental tax (2025). - Review of real estate tax exemptions and incremental revision of the property tax rate (2026). - Revenue administration: - Urgent need for strategic plan for the General Directorate of Taxation; leverage data to improve compliance in cash-intensive tourism sector and by high-net-worth individuals. - Recommendation: finalize and adopt an updated Medium-Term Revenue Strategy (MTRS) as soon as feasible. - Public expenditure efficiency: - Public sector wage increases and indexation imply medium- and long-term spending pressures. - Public pension system deficit: pension spending 2022: 6.1 percent of GDP; pension revenue 2022: 5 percent of GDP; deficit around 1 percent of GDP in 2022. - Recommendation: combine wage increases with public sector function reviews, efficiency gains, PFM reforms, and World Bank Public Expenditure Review inputs. ### Monetary policy, exchange-rate framework, and de-euroization - BoA actions and policy stance: - BoA resumed tightening in November 2023; policy rate hiked by 25 basis points to 3.25 percent in November 2023. - Cumulative rate hikes since early 2022: 250 basis points (or cumulative 275 basis points through 2023 per Annex I). - Policy rate path: staff estimate gradual increase to a broadly neutral stance—estimated at around 4½ percent—should help inflation return to target by early 2025. - Real domestic policy rates approaching pre-pandemic levels but remain in negative territory and below staff’s estimated range for the real neutral rate. - Recommended approach: flexible meeting-by-meeting rate setting; further increases likely required to return inflation to target. - Exchange rate policy and FX intervention: - Flexible exchange rate recommended as first line of defense; FXI only in disorderly market conditions. - Assessment: Albania does not seem to meet conditions warranting active FXI under the IPF at the current juncture; passthrough from appreciation to inflation is relatively small (estimated elasticity 0.05; 1 percent appreciation → inflation reduction ≈ 0.09 percent). - De-euroization: - High euroization (roughly half of banking sector deposits and loans in 2022) weakens monetary transmission. - Recommendation: de-euroization efforts by BoA complemented by government administrative actions to promote local currency pricing and payment of non-tradable goods; deepen domestic FX markets and derivative markets. - Monetary transmission evidence: - In Albania, a 100 basis points increase in the interest rate can be expected to bring about a 15 percent decline in output and a 1.8 percent decrease in prices in model estimates (responses dissipate after one quarter; confidence intervals large). ### Financial sector resilience, vulnerabilities, and recommended reforms - Banking sector metrics (selected): - Overall capital adequacy ratio (CAR): 19 percent (Sep-23). - Regulatory capital as percent of RWAs: 19.6 (Sep-23). - Regulatory Tier 1 capital as percent of RWAs: 18.2 (Sep-23). - Nonperforming loans (gross) as percent of total loans: 5.2 (Sep-23); NPLs at 10-year lows per staff text. - Securities account for 39 percent of bank assets; >80 percent of securities are government securities; about 60 percent intended to be held to maturity (HTM). - Foreign currency-denominated loans to total loans: 47.5 (Sep-23). - Key vulnerabilities: - Rising concentration of lending linked to the real estate sector. - Significant share of unhedged FX borrowing, especially household mortgages and real estate investment. - Securities exposure and interest-rate risk: BoA stress test—3 percent increase in domestic and global rates implies modest capital shortfalls for some banks; forced liquidation of HTM portfolios could drop CAR under 12 percent for some banks. - Cyber risk and climate-related risks (need for data, disclosure, scenario analyses). - Recommended macroprudential and supervisory measures: - Enhanced preemptive macroprudential policies, including differential LTV and DTI requirements for domestic and FX loans. - Consider a positive neutral countercyclical capital buffer (CCyB). - Align supervision and regulation with EU standards; transposition of CRD IV into new banking law started. - Operationalize insolvency and resolution frameworks; resolve bailiff reform impasse; speed up NPL workout and out-of-court settlements. - Strengthen governance, fit-and-proper criteria, risk-based inspections, AML/CFT oversight. - Deepen capital markets to diversify bank securities exposure and attract nonresident investors. - Allow banks with temporary capital shortfalls to adopt credible capital restoration plans; staff supports measures to temporarily suspend dividends where needed. ### Structural policies, governance, and labor market reforms - Rule of law and anti-corruption: - Judicial reform progress: SPAK fully operationalized; vetting of judges on track to finalize by constitutional deadline of December 2024; vetting 90 percent completed per Annex I. - Need to reduce case backlogs: integrated case management system, address judicial vacancies, transparent merit-based appointments to High Judicial and High Prosecutorial Councils. - Adoption and implementation of the 2024–30 National Anticorruption Strategy recommended; comply with GRECO recommendations. - AML/CFT: - FATF removed Albania from its list of countries under increased monitoring in October 2023. - Recommendation: sustain commitment to FATF principles and best practices. - Human capital, demographics, and labor participation: - Emigration and aging population are major constraints. - Female labor force participation: - Closing the female labor force participation gap could increase GDP level by 5 percent. - Female participation: 2010 ~54 percent; 2022: 66.7 percent; gender gap in 2022 more than 13 percentage points. - Participation and program spending: IMF staff calculations—Albania spent 0.7 percent of the 2022 budget on active labor market policies; draft 2024 budget: gross spending on labor market and VET policies at 0.09 percent of the 2024 budget; only 1 percent of women participate in active labor market programs. - Policy recommendations: expand childcare and care services, better target active labor market programs, modernize education curriculum, improve vocational training and digital skills, align minimum wage adjustments with productivity. - Education, infrastructure, and GVCs: - Albania’s links with GVCs are among the weakest in the Western Balkans due to export concentration in low-value manufacturing, unprocessed goods, and tourism. - IMF analysis: improving infrastructure, labor skills, and investor-protecting trade policies could enhance GVC engagement. ### Social indicators and pensions - Key social and macro indicators (selected): - Population: 2.8 million (2022) - Per capita GDP ($): 6743 (2022) - Life expectancy (years): 76.5 (2022) - Literacy rate: 99% (2022) - Nominal GDP ($bn): 18.9 (2022) - Poverty rate: 25.2% (2022) - Quota: SDR 139.3 million (0.03 percent of total) - Unemployment rate (%): 2020: 11.7; 2021: 11.4; 2022: 11.1; 2023: 11.0; 2024: 11.0 - Pensions: - Pension spending: 2022: 6.1 percent of GDP; pension revenue: 2022: 5 percent of GDP; deficit around 1 percent of GDP in 2022. - Aggregate replacement rate: 34 percent. - Average pension: 19,000 ALL per month; lowest decile: 8,500 ALL; highest decile: 38,000 ALL. - Social pension: ALL 8,588 in 2022 (about one fourth of the minimum wage); fewer than 2,000 individuals receive the social pension. - Recent public sector wage reform: average salary to rise by 40 percent to EUR 900 (announced and implemented in April—June 2023); wages indexed to average annual inflation at least every two years starting in 2026 with a cap at the inflation target plus one percentage point; expected roughly 30 percent increase in public sector wage bill by 2026. - IMF staff estimate: public wage spillovers raise inflation by about half a percentage point in 2024 and 2025. - Policy recommendations for pensions and wages: - Ensure wage increases accompanied by revenue measures and efficiency improvements; integrate wage policies into budgetary framework; consider performance-based pay; update pension projections (new exercise with World Bank support expected in 2024). ### Risk assessment, contingency policies, and downside scenario responses - Selected risks and policy responses (from Risk Assessment Matrix and downside scenario): - Commodity price volatility (Likelihood: High; Impact: High) - Adjust pace of monetary policy tightening; targeted temporary income support; gradually adjust electricity tariffs to cost recovery; reinvigorate energy sector reforms; prepare backup power plan. - Intensification of regional conflict(s) (Likelihood: High; Impact: Medium) - Implement commodity-shock coping policies. - Abrupt global slowdown in Europe (Likelihood: Medium; Impact: High) - Recalibrate fiscal consolidation pace within credible revenue-based plan; seek additional official financing; better target fiscal support; monitor fiscal and financial risks; adjust monetary policy pace. - Monetary policy miscalibration (Likelihood: Medium; Impact: Medium) - Data-driven pace of normalization and clear communication of BoA strategy. - Extreme climate events (Likelihood: Medium; Impact: High) - Integrate adaptation and mitigation measures into budgets; adjust electricity tariffs; prepare backup power supply. - Cyberthreats (Likelihood: Medium; Impact: Medium) - Implement IMF TA measures to reduce cyber-attack risk; adopt comprehensive cyber-testing and BCM exercises. - Exchange rate volatility and debt rollover risks (Likelihood: Medium–High; Impact: High) - Tighten macroprudential regulation; diversify debt holder base and lengthen maturities; improve market communication; accelerate revenue-based fiscal adjustment; seek official financing as needed. - Downside scenario policy recommendations: - Targeted and temporary fiscal support to most vulnerable; recalibrate fiscal adjustment pace within credible revenue-based consolidation. - Seek additional official financing if necessary. - BoA to rein in inflation with decisive monetary tightening and clear communication. - Continue fiscal structural efforts, monitor loan quality, adopt credible capital restoration plans; allow temporary deviation below prudential capital limits if needed. *International Monetary Fund staff report for the 2023 Article IV Consultation (staff assessment based on information available as of December 11, 2023).* ### 3.6 percent in 2023 and 3.3 percent in 2024 led by resilient private consumption, with notable ### 1albea2024001 - 3.6 percent in 2023 and 3.3 percent in 2024 led by resilient private consumption, with notable ### Macroeconomic outlook and risks - Real GDP growth: - 2022: 4.8 percent - 2023: 3.6 percent - 2024: 3.3 percent - Growth drivers: - Resilient private consumption - Notable strength in tourism and construction activity - Inflation: - Inflation (average): 2022: 6.7 percent; 2023: 4.8 percent; 2024: 4.0 percent - Inflation (end-period): 2022: 7.4 percent; 2023: 3.8 percent; 2024: 3.6 percent - Current level hovers around 4 percent amid tight labor markets - Expected to revert gradually to the 3 percent target by early 2025 - External and other risks: - Heightened geopolitical tensions as a major potential headwind - Vulnerabilities to weather-related energy sector shocks - Risk of a sudden reversal of the exchange rate appreciation - Risk of more persistent inflation - External position and exchange rate: - Current account (% GDP): 2022: -6.0; 2023: -3.5; 2024: -4.4 - Lek appreciated steeply since Q4 2022; assessed to be modestly overvalued - A flexible exchange rate is recommended as the first line of defense ### Fiscal position and recommendations - Fiscal indicators: - Revenues (% GDP): 2022: 26.8; 2023: 28.0; 2024: 27.4 - Expenditures (% GDP): 2022: 30.4; 2023: 30.2; 2024: 29.9 - Fiscal balance (% GDP): 2022: -3.7; 2023: -2.2; 2024: -2.5 - Primary balance (% GDP): 2022: -1.8; 2023: 0.0; 2024: 0.2 - Public debt (% GDP): 2022: 65.5; 2023: 61.1; 2024: 60.4 - Gross financing needs elevated - Recommended fiscal strategy: - A meaningful revenue-based fiscal consolidation starting in 2024 is critical to build fiscal space - Additional frontloaded cumulative net fiscal measures of around 1½ percent of GDP would bring public debt on a clear downward path and lower gross financing needs - Consolidation should be achieved through a sound revenue mobilization strategy, coupled with efficiency gains and reallocation of resources to infrastructure, education, and climate adaptation - Continue to lengthen debt maturities and reduce reliance on floating rate debt - Advance fiscal reforms enhancing governance and oversight of SOEs (including in the energy sector) and PPPs to safeguard fiscal sustainability ### Monetary policy and exchange-rate framework - Policy stance and recommendations: - Bank of Albania (BoA) resumed monetary tightening in November 2023 - Returning inflation to target will likely require some further increases in the policy rate - Gradual increase of the policy rate to a broadly neutral stance—estimated at around 4½ percent—should help allow inflation to return to target by early 2025 - Uncertainty around the inflation path remains high; a flexible meeting-by-meeting approach to rate-setting is appropriate - A flexible exchange rate should remain the first line of defense; intervention only in disorderly market conditions - De-euroization efforts, supported by government action to promote the use of local currency as the legal tender, would raise the effectiveness of the inflation targeting regime - Policy rate (end-period): - 2020: 0.5 percent - 2021: 0.5 percent - 2022: 2.8 percent - 2023/2024: not specified in table ("...") ### Financial sector resilience and reforms - Banking sector assessment: - Banking system overall appears more resilient, but some pockets of vulnerabilities exist - Scope to strengthen capital positions of some banks, alongside prudent provisioning and focused asset quality reviews - Over the medium-term, a positive neutral countercyclical capital buffer rate could be considered to support financial stability - Recommended financial-sector measures: - Enhanced preemptive macroprudential policies, including differential LTV and DTI requirements for domestic and FX loans - Further progress on aligning supervision and regulation with EU standards - Operationalize insolvency and resolution frameworks - Strengthen governance and deepen capital markets - Policies to facilitate faster workout of non-performing loans and promote corporate governance in the banking sector ### Structural policies and longer-term reforms - Key structural challenges: - Shortfalls in the rule of law and corruption concerns - Emigration pressures and low credit penetration - Gaps in youth and female labor force participation; informality around 30 percent of GDP - Recommended reforms: - Judicial reforms to increase efficiency and address case backlogs - Sustained and robust commitment to AML/CFT reforms and best practices following exit from FATF’s list of countries under increased monitoring - Policies to boost female labor force participation and retain human capital - Adequate budget resources and monitoring mechanisms to ensure reforms translate into better outcomes - EU accession momentum: - Albania should seize opportunities afforded by growing momentum of EU enlargement to address long-standing structural challenges ### Key social and macro indicators (selected) - Population: 2.8 million (2022) - Per capita GDP ($): 6743 (2022) - Life expectancy (years): 76.5 (2022) - Literacy rate: 99% (2022) - Nominal GDP ($bn): 18.9 (2022) - Poverty rate: 25.2% (2022) - Quota: SDR 139.3 million (0.03 percent of total) - Employment: - Unemployment rate (%): 2020: 11.7; 2021: 11.4; 2022: 11.1; 2023: 11.0; 2024: 11.0 - Money and credit: - Broad money (% change): 2022: 5.2; 2023: 6.4; 2024: 6.4 - Credit to the private sector (% change): 2022: 7.0; 2023: 4.3; 2024: 3.6 - Balance of payments and reserves: - FDI (% GDP): 2022: -6.6; 2023: -7.1; 2024: -7.2 - Reserves (months of imports): 2022: 6.9; 2023: 6.5; 2024: 6.1 - External debt (% GDP): 2022: 54.3; 2023: 51.5; 2024: 48.7 *International Monetary Fund staff report for the 2023 Article IV Consultation (staff assessment based on information available as of December 11, 2023).* ### 7. The Bank of Albania recently resumed rate hikes. Citing persistent domestic price ### 7. The Bank of Albania recently resumed rate hikes. Citing persistent domestic price ### Monetary policy, inflation, and exchange rate - The BoA raised the policy rate by 25 basis points to 3.25 percent in its November meeting. - This followed cumulative rate hikes of 250 basis points since early 2022 and a period of unchanged policy rates during March‒October 2023. - Real domestic policy rates are now approaching pre-pandemic levels but remain in negative territory and below staff’s estimated range for the real neutral rate. - High euroization suggests that spillovers from ECB policies have likely translated into some additional financial tightening, although there is uncertainty about their strength and timing. - Inflation outlook and timing: - Headline inflation is expected to continue decelerating given base effects. - Inflation is forecast to return to the BoA’s target of 3 percent only by early-2025 (compared to mid-2024 as expected at the time of the Spring 2023 IMF WEO). - IMF research indicates the increase in public sector wages will have spillovers into average wages, especially against a tight labor market and a positive output gap. ### Credit, real estate, and financial stability - Tighter financial conditions have reduced credit growth to households and firms. - As of 2023Q3: - Mortgage loans to households and real estate loans to businesses were the main driver of still positive credit growth. - Other loans to businesses have declined y/y. - The credit gap has recently turned negative. - House price indices have rapidly increased despite slowing credit growth. - Unhedged FX loans as a share of total loans have been declining, but most unhedged borrowing relates to households’ mortgages and investment in real estate, posing vulnerability given high euroization. - Policy recommendation: Close monitoring of loan portfolio quality and timely identification and management of problem assets; adopt a credible capital restoration plan while capital could be allowed to temporarily fall below prudential limits if necessary. ### Outlook and risks - Growth projections: - Real GDP is projected to grow by 3.6 and 3.3 percent in 2023 and 2024, respectively. - Growth then converges towards long-term potential growth of 3½ percent. - Consumption growth is expected to soften as monetary policy pass-through proceeds, but tourism-fueled services activity and a pipeline of private and donor-funded FDI projects will support growth. - Gains from growing tourism are expected to be tempered by continued emigration and an aging population. - Current account and reserves: - The current account balance is on track to improve in 2023, pushed by strong tourism-related inflows. - International reserves are expected to remain well above adequacy levels, at close to 200 percent of the ARA metric by end-2023. - After 2024, the current account deficit is projected to be on a declining trend as services exports related to tourism increase with sustained tourism-related FDI. - Downside scenario (Box 1): - Shock drivers: recurrence of an energy crisis and supply disruptions, sharper-than-expected monetary tightening, abrupt global slowdown. - Transmission: reduction in tourism and remittances, sudden and sharp depreciation of the lek, higher inflation, tighter global/domestic financial conditions raising government financing costs, pressure on unhedged euro-denominated private credit, sharp corrections in real estate prices, amplified financial stability risks. - Policy response recommended: - Targeted and temporary fiscal support to the most vulnerable; recalibrate pace of fiscal adjustment within a credible revenue-based medium-term consolidation plan. - Seek additional official financing if necessary. - BoA to rein in inflation with decisive monetary tightening and clear communication. - Continue fiscal structural efforts to increase efficiency and transparency. - Monitor loan quality and adopt a credible capital restoration plan; allow temporary deviation below prudential capital limits if needed. ### Fiscal policy, public debt, and financing - Fiscal stance and near-term outcomes: - The authorities are expected to reach a zero primary balance in 2023 following a normative act in October that revised estimated revenues upwards and allocated more resources to operations and maintenance and domestically financed capital spending. - The zero primary balance is below the budgeted 0.3 percent of GDP but ensures compliance with the Organic Budget Law requirement of a nonnegative balance one year ahead of the deadline. - 2024 budget and near-term expectations: - The draft 2024 budget targets a small primary surplus. - Stronger fiscal position in 2024 will be achieved through higher tax revenue from the new income tax law and by keeping expenditure stable, with lower budgeted capital spending offsetting a higher wage bill. - Staff expects the 2024 budget target will be met but projects higher-than-budgeted current spending in some categories to be offset by under-execution of planned foreign-financed capital spending due to capacity limitations. - Staff recommends any revenue overperformance be saved and normative acts be avoided to enhance budget predictability. - Medium-term baseline and risks: - Staff’s baseline assumes limited fiscal adjustment beyond 2024 in the absence of revenue reforms; apart from marginal tightening in 2025–26, no fiscal consolidation is expected in cyclically adjusted terms. - Public debt, which reached pre-pandemic levels in 2022, is expected to decline marginally to just under 60 percent of GDP by end-2028. - Gross financing needs (GFN) remain high, averaging around 18 percent of GDP in 2023–28, and are subject to risks from fiscal slippages. - SR-DSF results point to moderate risk of debt distress in the medium/long term. - Staff proposed fiscal adjustment: - Additional cumulative net fiscal measures of around 1½ percent of GDP over the next five years (frontloaded to 2024 and 2025) to reduce GFN and rollover risks to under 15 percent of GDP by 2028. - Proposed composition of measures: - Revenue mobilization: about 2 percent of GDP. - Efficiency gains: ½ percent of GDP. - Higher productive spending: 1¼ percent of GDP on public investment, education, and climate adaptation once public investment management frameworks are improved and absorptive capacity strengthened. - Implementation of the 2022–26 Debt Management Strategy will be critical to lengthen maturities and reduce exposure to floating rate debt. ### Revenue strategy, tax measures, and public expenditure management - Revenue mobilization and tax policy options: - There is scope to rationalize and streamline VAT rates, exemptions, and thresholds. - Consider frontloading measures slated for later introduction, such as removing the zero-income tax rate for businesses with an annual turnover of up to 14 million lek. - Proceed with prerequisites for property and gambling tax reforms, including fully operationalizing a centralized fiscal cadaster. - Urgent need to step up revenue administration reforms: strategic plan for the General Directorate of Taxation, further leveraging data to improve compliance—particularly in the cash-intensive tourism sector and by high-net-worth individuals. - Strengthen coordination among implementing agencies to ensure timely delivery and transparency of reforms. - Medium-Term Revenue Strategy (MTRS): - An updated MTRS should be formulated and adopted as soon as feasible to provide a cohesive, transparent, and credible blueprint for tax policy and administration reforms. - MTRS would support efforts to reduce informality, promote fair competition through improved tax compliance, and rationalize tax structures to better incentivize formal employment. - Specific tax and administration measures (timing and magnitude preserved as in source): - Staff indicates cumulative revenue gains (Text Table 1 and Text Table 2) and a list of MTRS measures with start dates ranging from 2024 to 2029, including: - Ending exemption on private health and education services (2024). - Ending exemption on insurance services (2026). - Revising the VAT registration threshold (2026). - Removal of other exemptions from excise duty (2025). - Taxation scheme for self-employed professions (2024; measure already included in the baseline). - Expansion of categories of gambling (2024); expansion of environmental tax (2025); review of real estate tax exemptions and incremental revision of the property tax rate (2026). - Revenue administration measures shown with phased gains reaching 1.2 percent of GDP in later years. - Public expenditure efficiency and structural reforms: - Medium- and long-term spending pressures from recent public sector wage increases and indexation to inflation underline the need to improve public expenditure efficiency. - Albania’s public pension system is already experiencing a deficit and represents a growing burden on public resources absent further reforms. - Higher public wages should be combined with a review of public sector functions and linked to efficiency increases, including leveraging technology and on-the-job training. - Further rationalization of public spending should be considered in the context of the World Bank’s forthcoming Public Expenditure Review. - Public investment management (PIM) and PPPs: - Comprehensive PIM guidelines (adopted late 2022) should be operationalized to strengthen project classification, establish a prioritized project pipeline, and enhance capacity for project management and monitoring. - Progress on the third PFM Strategy and procurement reforms would improve resource allocation efficiency. - PPPs value around one-third of GDP; strengthening the PPP framework and integrating PPPs into the PIM framework and the regular budgetary process is critical. - The revised PPP law should clarify institutional responsibilities, including the role and capacity of the MoFE as gatekeeper; unsolicited proposals—accounting for four-fifths of existing PPP contracts—should be eliminated. - Fiscal risk management: - Authorities plan to prepare a standalone, comprehensive Fiscal Risk Statement starting in 2024; it should be forward-looking and cover PPPs, contingent implicit and legal liabilities, and SOEs. - The Fiscal Risk Unit should expand its coverage of SOEs. - Operationalizing the SOE Health Check Tool (with Fund TA) and clearly identifying risk mitigation measures are recommended. *Source: 1albea2024001 - 7. The Bank of Albania recently resumed rate hikes. Citing persistent domestic price* ### 22. Albania's climate vulnerability calls for timely and concrete actions, especially given ### 22. Albania's climate vulnerability calls for timely and concrete actions, especially given ### Climate vulnerability and the energy sector - Albania relies on hydropower as its main source of electricity, which is susceptible to climate change and rainfall patterns. - The energy SOEs have been loss-making over many years and have relied on public support to maintain financial viability. - Recommended actions: - Fully operationalize the power exchange ALPEX as a platform for price discovery. - Develop other sources of renewable energy. - Strengthen hydrological financial risk management. - Gradually adjust tariffs to fully reflect costs. - Improve corporate governance. ### Integrating climate adaptation into national policies and budgeting - To ensure adequate resources for climate action, continue integrating climate adaptation policies into national decision processes and policies. - Implementation of the February 2023 National Strategy for Development and European Integration 2022–30 is critical; it envisages better incorporation of Albania’s National Determined Contribution priorities into strategic planning and medium-term budgeting. ### Authorities’ Views (fiscal) - The authorities concurred with the need for fiscal prudence. - They will continue work on tax policy reforms—including on property and gambling tax—but emphasized the need for better revenue administration. - They intend to update the MTRS to better reflect the current macro-fiscal environment, including the growing role of tourism. - Tax policy measures must comply with EU regulations. - Priority: speed up execution of foreign-financed projects in the context of EU accession. - Authorities welcomed ongoing Fund TA and look forward to continued Fund engagement. ### Monetary and exchange rate policy - Recent BoA action: hiked the policy rate by 25 bps to 3.25 percent in November 2023. - Rationale: domestic inflationary pressures are rising given tight labor markets; real rates still negative and below neutral. - Staff baseline: gradual increase of the policy rate to a broadly neutral stance, with a terminal rate of about 4½ percent by 2025. - This path—together with lagged effects from ECB tightening and past exchange rate appreciation—is projected to ensure convergence to the inflation target by 2025. - Recommended approach: flexible meeting-by-meeting approach to setting rates due to high uncertainty around the inflation path. - Central bank equity and revaluation losses: - BoA has a strong statutory equity position and is expected to post positive realized profits in the near to medium term. - BoA recognition of significant, but recent, unrealized revaluation losses should not detract from focus on price stability. - The BoA should work with the MoFE towards a shared interpretation of the BoA’s organic law that would not require issuance of additional securities. - Exchange rate policy: - A flexible exchange rate should remain the first line of defense against external shocks. - Movements (appreciation) starting in late 2022 were sharper than suggested by fundamentals; BoA made two unscheduled interventions and increased frequency and magnitude of scheduled interventions in August. - Albania does not seem to meet criteria for use of foreign exchange interventions (FXI) under the IPF at the current juncture (Annex IX). - De-euroization: - High euroization inhibits effectiveness of inflation targeting. - Staff analytical work highlights challenges; de-euroization measures by the central bank should be complemented by administrative government actions to promote use of local currency for pricing and payment of non-tradable goods. - Further measures to deepen domestic FX markets and augment price discovery and derivative markets would support de-euroization. - Authorities’ Views (BoA): - BoA indicated gradually increasing the policy rate towards its equilibrium level will ensure convergence of inflation by the second half of 2024. - BoA will proceed in a data driven and cautious manner, accounting for exchange rate movements and fiscal stance. - BoA agrees exchange rate should remain flexible and views summer policy actions as instrumental in reducing volatility and high bid-ask spreads. - Authorities view issuance of securities to cover revaluation losses as unnecessary. ### Financial stability: resilience and vulnerabilities - Banking system metrics: - Overall capital adequacy ratio (CAR) at 19 percent (well above Albanian minimum requirement of 12 percent). - Returns on assets exceed their long-term average. - NPLs have dipped to 10-year lows. - Stress tests: - Show broad resilience to growth, interest, and real exchange rate shocks on NPLs, but significant bank heterogeneity exists. - Some banks experience capital shortfalls under macroprudential buffer requirements. - Policy support: - Staff supports BoA efforts to strengthen bank capital buffers, including asking banks with shortfalls to temporarily suspend dividends. - Further actions could include obligation to prepare a capital conservation plan and regulatory restrictions. - Securities exposure: - Securities account for 39 percent of bank assets. - More than 80 percent of securities are government securities, of which around two-thirds are domestic. - About 60 percent of securities are intended to be held to maturity (HTM). - BoA stress tests on AFS securities show a further increase in domestic and global interest rates by 3 percent would result in modest capital shortfalls for some banks. - If banks were forced to liquidate HTM portfolios under stress, a fall in the value of the nonresident portfolio by around 30 percent would result in the CAR falling under 12 percent. - Previous IMF work indicates a systemic risk buffer on banks with large and concentrated securities portfolios may mitigate these risks. ### Emerging financial vulnerabilities and recommended prudential actions - Identified vulnerabilities and measures: - Rising concentration of lending linked to the real estate sector. - Data gaps prevent timely monitoring; BoA regulation on collecting LTV and DTI indicators is key. - Significant share of unhedged FX borrowing. - Several macroprudential tools are in place to mitigate risks from FX lending and deposits. - Consider introducing differential LTV and DTI requirements for domestic and FX loans. - A positive neutral countercyclical capital buffer (CCyB) could be introduced. - Cyber risk. - BoA should prepare and adopt a comprehensive cyber-testing strategy and define and test business continuity management exercises; formalize vulnerability assessments on financial market infrastructures and critical systems. - Climate risk. - BoA has developed a multi-year strategy for management and supervision of climate-related risks. - Key steps: identify data gaps, develop disclosure principles, scenario analyses and stress tests, and develop/implement prudential instruments for identified gaps. - Continued structural and regulatory reforms recommended: - Align supervisory and regulatory frameworks with EU standards; transposition of the Capital Requirements Directive (CRD IV) into a new banking law has started. - BoA expects banks to comply with IFRS9 starting in 2024. - Implement insolvency and resolution frameworks; bailiff reform impasse resolved to facilitate execution of collaterals; further progress in out-of-court settlements to speed NPL resolution. - Promote governance: encourage sound governance, assurance of fit and proper criteria for market players and significant shareholders, enhanced risk-based inspections, and effective AML/CFT oversight. - Deepen capital markets: April 2023 policy document adopted to promote participation, increase range of instruments, expand and diversify investor base, attract more non-resident investors, strengthen investing capacities of non-bank financial institutions, and increase liquidity in government securities’ secondary markets. - Authorities’ Views (BoA on banking sector): - BoA sees the banking sector as liquid and well-capitalized, agrees on need to sustain reform momentum. - Rising bank profitability provides opportunity to increase capital buffers and comply with MREL requirements. - Collecting more data on the real estate sector and climate exposures is key. - BoA agreed on need for a new Financial Sector Assessment Program (last one dated 2014). ### Structural reforms and broader growth impediments - Albania faces persistent challenges closing the income gap with EU countries. - Mutually reinforcing impediments to productivity include: - Widespread informality. - Weaknesses in governance and the rule of law. - Significant gender gaps in labor force participation. - High youth inactivity. - Infrastructure gaps. - Additional threats to growth: emigration of workers and a rapidly aging population. *Source: IMF staff report excerpts from the provided chapter content.* ### 35. The authorities are alert to these ### 35. The authorities are alert to these ### Judicial reform and rule of law - A comprehensive judicial reform program has progressed steadily; Albania has fully operationalized and improved the capacity of the Special Structure Against Corruption and Organized Crimes (SPAK), which has increased enforcement, investigation, prosecution, and adjudication. - The authorities appear on track to finalize the vetting of judges and other judicial officials by the constitutional deadline of December 2024. - Further progress needed to reduce case backlogs: - Set up an integrated case management system. - Address judicial vacancies. - Build on efficiency gains from the new judicial map. - The appointment of new members of the High Judicial Council and High Prosecutorial Council should be fully transparent, merit-based, and competitive. - The Albanian justice system is still perceived to be afflicted with corruption, structural inefficiencies, and professional shortages. ### Anti-corruption strategy and public investment management - SPAK should continue to have adequate resources to fulfill its mandate. - SPAK’s recent high-profile prosecutions involving some of the country’s largest PPP projects demonstrate how corruption, coupled with a weak PIM framework, could inflate the cost of public investment. - The adoption and implementation of the 2024–30 National Anticorruption Strategy, planned for early 2024, should proceed without delay. - Efforts should address recommendations by the Council of Europe’s Group of States Against Corruption (GRECO), including those related to post-employment restrictions for members of the Council of Ministers and political advisors, as well as police reforms. ### AML/CFT - In October 2023, the Financial Action Task Force (FATF) removed Albania from its list of countries under increased monitoring (“grey list”), citing major progress in addressing strategic AML/CFT deficiencies. - The exit from FATF’s grey list should bolster the authorities’ commitment; efforts to further strengthen Albania’s AML/CFT regime should continue. - Steadfast commitment to FATF principles and best practices, including strengthened monitoring of cross-border transactions and any future voluntary disclosure programs, remains crucial. ### Human capital, labor markets, and demographic pressures - Accelerating emigration underscores the urgency of decisive implementation of policies to develop and retain human capital; policies should promote economic and social conditions for return migration. - Key reform areas include: - Modernizing the education curriculum. - Improving the relevance and quality of vocational training. - Investing in digital skills. - Fostering R&D to nurture innovation. - Adjustments to the minimum wage and other salaries should be closely aligned with average productivity growth of workers. - Adequate budget resources and monitoring mechanisms are needed to ensure reform efforts translate into better outcomes. ### Gender, labor participation, and childcare - Increasing female labor force participation can help reduce labor shortages and boost growth. - The gender gap in labor force participation remains high for women with lower than tertiary educational attainment. - Closing this gender gap could increase the level of GDP by 5 percent. - Expanding access to childcare facilities could boost participation and ease labor shortages especially for women without tertiary education. ### Infrastructure, public investment, and global value chains (GVCs) - Progress on human capital and governance, while closing infrastructure gaps, would help Albania become more integrated in global value chains. - Albania’s links with GVCs are among the weakest in the Western Balkans, primarily due to high concentration of exports in low-value manufacturing products, unprocessed goods, and tourism. - IMF analysis shows that by improving infrastructure, labor skills and adopting trade policies that ensure investor protection and harmonize regulations and legal provisions, Albania can greatly enhance its engagement with GVCs. ### Authorities’ views - The authorities broadly concurred with staff on structural reform priorities. - They viewed the exit from the grey list as evidence of the robustness of Albania’s AML/CFT framework. - They highlighted significant increases in anticorruption actions—including high-profile prosecutions—and expect imminent recruitments that will bring SPAK to full prosecutorial capacity. - The authorities agreed on the urgency of labor market reforms (vocational training programs, expanding access to child and elderly care) and recognized the importance of upgrading infrastructure to harness tourism potential. - Overall, they see the acceleration in EU accession as a boon for structural reforms. ### Staff appraisal — macroeconomic outlook and policy recommendations - Growth and inflation outlook: - Real GDP growth is projected at 3.6 percent in 2023 and 3.3 percent in 2024 led by resilient private consumption, with notable strength in tourism and construction activity. - Inflation hovers around 4 percent amid tight labor markets and is expected to revert gradually to the 3 percent target by early 2025. - Risks: - Heightened geopolitical tensions. - Vulnerability to weather-related energy sector shocks. - Sudden reversal of the exchange rate appreciation. - More persistent inflation. - Fiscal policy: - A meaningful revenue-based fiscal consolidation starting in 2024 is critical to build fiscal space for future countercyclical policy. - Additional frontloaded cumulative net fiscal measures of around 1½ percent of GDP would bring public debt on a clear downward path and lower gross financing needs. - Consolidation should rely on a sound revenue mobilization strategy, coupled with efficiency gains and reallocation of resources to infrastructure, education, and climate adaptation. - Continue to lengthen debt maturities and reduce reliance on floating rate debt. - Advance fiscal reforms that enhance governance and oversight of SOEs, including in the energy sector, and PPPs to safeguard fiscal sustainability. - Monetary and exchange rate policy: - Returning inflation to target will likely require some further increases in the policy rate. - The BoA appropriately resumed monetary tightening in November 2023 as domestic inflationary pressures persist amid tight labor markets. - A gradual increase of the policy rate to a broadly neutral stance—estimated at around 4½ percent—should help allow inflation return to target by early 2025. - A flexible meeting-by-meeting approach to rate-setting is appropriate given high uncertainty around the inflation path. - A flexible exchange rate should remain the first line of defense against external shocks. - Enhanced preemptive macroprudential policies are recommended, including differential LTV and DTI requirements for domestic and FX loans. - Further de-euroization efforts, supported by government action to promote the use of local currency as the legal tender, would raise the effectiveness of the inflation targeting regime. - Financial sector: - The banking system overall appears more resilient, but some pockets of vulnerabilities exist. - Strengthen capital positions of some banks, ensure prudent provisioning, and conduct focused asset quality reviews. - Over the medium-term, a positive neutral countercyclical capital buffer rate could be considered to support financial stability. - Further progress on aligning supervision and regulation with EU standards, operationalizing insolvency and resolution frameworks, strengthening governance and deepening capital markets would support durable credit growth. - Structural reforms: - Albania should seize the opportunities from EU enlargement momentum to address long-standing structural challenges. - Judicial reforms should be complemented by increased efficiency to address the backlog in cases. - Build on exit from FATF’s list by ensuring sustained and robust commitment to AML/CFT reforms and best practices. - Address gaps in youth and female labor force participation to help lift potential growth. - Ensure adequate budget resources and monitoring mechanisms so reform efforts translate into better outcomes. *Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1albea2024001.pdf* ### 47. It is proposed that the next Article IV consultation be held on the standard 12-month ### 1albea2024001 - 47. It is proposed that the next Article IV consultation be held on the standard 12-month ### Consultation timing - It is proposed that the next Article IV consultation be held on the standard 12-month cycle. ### Real sector: growth and contributions (2019–28) - Real GDP growth: 2.1 (2019), -3.3 (2020), 8.9 (2021), 4.8 (2022), 3.6 (2023), 3.3 (2024), 3.4 (2025), 3.5 (2026), 3.5 (2027), 3.5 (2028). - Domestic demand contribution: 2.1 (2019), -3.2 (2020), 8.2 (2021), 8.4 (2022), 4.8 (2023), 3.9 (2024), 3.9 (2025), 3.7 (2026), 3.6 (2027), 3.6 (2028). - Consumption: 2.8 (2019), -2.3 (2020), 4.4 (2021), 4.8 (2022), 2.9 (2023), 2.4 (2024), 2.4 (2025), 2.2 (2026), 2.2 (2027), 2.2 (2028). - Investment (including inventories and statistical discrepancy): -0.6 (2019), -0.9 (2020), 3.8 (2021), 3.6 (2022), 2.0 (2023), 1.5 (2024), 1.5 (2025), 1.5 (2026), 1.5 (2027), 1.5 (2028). - External demand contribution: -0.1 (2019), -0.1 (2020), 0.7 (2021), -3.6 (2022), -1.2 (2023), -0.6 (2024), -0.5 (2025), -0.2 (2026), -0.2 (2027), -0.2 (2028). - Output gap: -1.1 (2019), -5.8 (2020), -0.4 (2021), 1.0 (2022), 0.8 (2023), 0.5 (2024), 0.3 (2025), 0.2 (2026), 0.1 (2027), 0.0 (2028). - Real GDP growth per capita: 2.2 (2019), -3.2 (2020), 9.1 (2021), 5.1 (2022), 3.9 (2023), 3.6 (2024), 3.8 (2025), 3.8 (2026), 3.8 (2027), 3.9 (2028). - Nominal GDP (in billions of lek): 1,692 (2019), 1,647 (2020), 1,856 (2021), 2,138 (2022), 2,310 (2023), 2,475 (2024), 2,636 (2025), 2,810 (2026), 2,996 (2027), 3,192 (2028). ### Inflation and price measures - Consumer Price Index (end of period): 1.1 percent (2019), 1.1 (2020), 3.7 (2021), 7.4 (2022), 4.8 (2023), 3.6 (2024), 3.0 (2025), 3.0 (2026), 3.0 (2027), 3.0 (2028). - Consumer Price Index (average): 1.4 (2019), 1.6 (2020), 2.0 (2021), 6.7 (2022), 4.8 (2023), 4.0 (2024), 3.2 (2025), 3.0 (2026), 3.0 (2027), 3.0 (2028). - GDP deflator: 1.3 (2019), 0.7 (2020), 3.5 (2021), 9.9 (2022), 4.3 (2023), 3.7 (2024), 3.0 (2025), 3.0 (2026), 3.0 (2027), 3.0 (2028). ### Saving–investment balance - Foreign savings: 7.6 (2019), 8.7 (2020), 7.7 (2021), 6.0 (2022), 3.5 (2023), 4.4 (2024), 4.4 (2025), 4.3 (2026), 4.1 (2027), 4.0 (2028). - National savings: 14.7 (2019), 14.0 (2020), 16.7 (2021), 17.9 (2022), 20.4 (2023), 20.2 (2024), 20.4 (2025), 21.1 (2026), 21.5 (2027), 22.0 (2028). - Investment (including inventories and stat. disc.): 22.3 (2019), 22.6 (2020), 24.4 (2021), 23.9 (2022), 23.9 (2023), 24.6 (2024), 24.8 (2025), 25.4 (2026), 25.6 (2027), 26.0 (2028). ### Fiscal sector: revenues, expenditure, balances (percent of GDP, 2019–28) - Total revenue and grants: 27.2 (2019), 25.9 (2020), 27.5 (2021), 26.8 (2022), 28.0 (2023), 27.4 (2024), 27.4 (2025), 27.5 (2026), 27.5 (2027), 27.5 (2028). - Tax revenue: 25.2 (2019), 24.2 (2020), 25.6 (2021), 25.3 (2022), 25.8 (2023), 25.8 (2024), 25.8 (2025), 25.9 (2026), 25.9 (2027), 25.9 (2028). - Total expenditure: 29.2 (2019), 32.6 (2020), 32.1 (2021), 30.4 (2022), 30.2 (2023), 29.9 (2024), 30.3 (2025), 30.2 (2026), 30.7 (2027), 30.8 (2028), 31.0 (some rows). - Interest: 2.1 (2019), 2.1 (2020), 1.9 (2021), 1.9 (2022), 2.2 (2023), 2.7 (2024), 2.9 (2025), 3.3 (2026), 3.4 (2027), 3.5 (2028). - Overall balance: -1.9 (2019), -6.7 (2020), -4.6 (2021), -3.7 (2022), -2.2 (2023), -2.5 (2024), -2.8 (2025), -3.2 (2026), -3.3 (2027), -3.5 (2028). - Primary balance: 0.1 (2019), -4.6 (2020), -2.7 (2021), -1.8 (2022), 0.0 (2023), 0.2 (2024), 0.1 (2025), 0.0 (2026), 0.0 (2027), 0.0 (2028). - Financing: 1.9 (2019), 6.7 (2020), 4.6 (2021), 3.7 (2022), 2.2 (2023), 2.5 (2024), 2.8 (2025), 3.2 (2026), 3.3 (2027), 3.5 (2028). - Domestic financing: 3.3 (2019), 3.0 (2020), -1.0 (2021), 4.1 (2022), 0.1 (2023), 3.1 (2024), 1.9 (2025), 1.1 (2026), 1.1 (2027), 1.7 (2028). - Foreign financing: -1.3 (2019), 3.7 (2020), 5.6 (2021), -0.4 (2022), 2.1 (2023), -0.6 (2024), 0.9 (2025), 2.1 (2026), 2.1 (2027), 1.7 (2028). ### Public debt (general government, percent of GDP; 2019–28) - General Government Debt: 67.4 (2019), 75.8 (2020), 75.2 (2021), 65.5 (2022), 61.1 (2023), 60.4 (2024), 60.4 (2025), 59.8 (2026), 59.5 (2027), 59.4 (2028). - Domestic debt: 36.9 (2019), 40.6 (2020), 38.6 (2021), 35.3 (2022), 33.0 (2023), 33.2 (2024), 33.3 (2025), 32.9 (2026), 32.7 (2027), 35.4 (2028). - External debt: 30.4 (2019), 35.2 (2020), 36.7 (2021), 30.2 (2022), 28.0 (2023), 27.2 (2024), 27.0 (2025), 26.9 (2026), 26.9 (2027), 24.1 (2028). ### General Government operations (selected items, percent of GDP) - VAT: 7.8 (2019), 7.9 (2020), 8.7 (2021), 9.0 (2022), 8.7 (2023), 8.7 (2024–2028 repeat). - Social insurance contributions: 5.8 (2019), 5.9 (2020), 6.0 (2021), 5.7 (2022), 6.2 (2023), 6.5 (2024), 6.5 (2025), 6.5 (2026), 6.5 (2027), 6.5 (2028). - Capital expenditure: 4.4 (2019), 6.2 (2020), 6.9 (2021), 5.3 (2022), 5.9 (2023), 4.7 (2024), 5.3 (2025), 4.7 (2026), 4.7 (2027), 4.7 (2028). ### Balance of payments and external sector (2019–28) - Current account balance (percent of GDP): -7.6 (2019), -8.7 (2020), -7.7 (2021), -6.0 (2022), -3.5 (2023), -4.4 (2024), -4.4 (2025), -4.3 (2026), -4.1 (2027), -4.0 (2028). - Trade balance (goods and services, percent of GDP): -13.6 (2019), -14.5 (2020), -13.4 (2021), -10.4 (2022), -10.5 (2023), -10.4 (2024), -10.5 (2025), -10.5 (2026), -10.5 (2027), -10.6 (2028). - Goods (fob) exports: 6.6 (2019), 6.0 (2020), 8.3 (2021), 10.7 (2022), 8.0 (2023), 8.1 (2024–2028 stable at 8.1–8.2). - Goods (fob) imports: 29.4 (2019), 28.4 (2020), 33.6 (2021), 34.4 (2022), 31.5 (2023), 31.5 (2024), 31.4 (2025), 31.4 (2026), 31.3 (2027), 31.3 (2028). - Secondary income (percent of GDP): 7.0 (2019), 7.5 (2020), 7.1 (2021), 6.2 (2022), 7.5 (2023), 6.7 (2024–2028 at 6.7). - Workers' remittances (percent of GDP): 5.1 (2019), 5.1 (2020), 5.0 (2021), 4.6 (2022), 5.0 (2023), 5.0 (2024–2028 at 5.0). - Financial account (percent of GDP): -6.0 (2019), -11.3 (2020), -10.3 (2021), -4.6 (2022), -4.9 (2023), -3.9 (2024), -3.4 (2025), -4.3 (2026), -4.2 (2027), -3.2 (2028). - Direct investment, net (percent of GDP): -7.5 (2019), -6.7 (2020), -6.5 (2021), -6.6 (2022), -7.1 (2023), -7.2 (2024–2028 at -7.2). - Gross international reserves (millions of euros): 3,360 (2019), 3,942 (2020), 4,972 (2021), 4,952 (2022), 5,329 (2023), 5,477 (2024), 5,519 (2025), 5,823 (2026), 6,175 (2027), 6,286 (2028). - Reserves in months of imports of goods and services: 6.5 (2019), 9.6 (2020), 8.8 (2021), 6.9 (2022), 6.5 (2023), 6.1 (2024), 5.9 (2025), 5.9 (2026), 5.9 (2027), 5.6 (2028). - Gross external debt (millions of euros): 8,246 (2019), 8,549 (2020), 9,755 (2021), 9,799 (2022), 10,939 (2023), 11,266 (2024), 12,031 (2025), 12,973 (2026), 13,877 (2027), 14,818 (2028). - Gross external debt (percent of GDP): 60.0 (2019), 64.2 (2020), 64.3 (2021), 54.3 (2022), 51.5 (2023), 48.7 (2024), 50.1 (2025), 51.3 (2026), 51.5 (2027), 51.6 (2028). - Nominal GDP (millions of euros): 13,754 (2019), 13,311 (2020), 15,162 (2021), 18,035 (2022), 21,260 (2023), 23,111 (2024), 23,994 (2025), 25,269 (2026), 26,960 (2027), 28,731 (2028). ### Monetary indicators and banking (2019–28) - Broad money growth: 4.3 (2019), 10.5 (2020), 8.6 (2021), 5.2 (2022), 6.4 (2023), 6.4 (2024–2028 at 6.4–6.5). - Private credit growth: 6.1 (2019), 8.9 (2020), 8.6 (2021), 7.0 (2022), 4.3 (2023), 3.6 (2024), 5.5 (2025), 6.4 (2026), 6.6 (2027), 6.5 (2028). - Broad money (end-period, billions of leks): 1,318.7 (2019), 1,456.9 (2020), 1,582.3 (2021), 1,665.1 (2022), 1,771.2 (2023), 1,884.6 (2024), 2,005.9 (2025), 2,136.6 (2026), 2,276.2 (2027), 2,423.6 (2028). - Reserve money (end-period, selected values): 423.4 (2019), 434.0 (2020), 534.3 (2021), 565.2 (2022), 619.2 (2023), 653.7 (2024), 693.4 (2025), 735.9 (2026), 774.2 (2027), 815.7 (2028). - Net foreign assets (Banking sector, end-period, billions of leks): 729.0 (2019), 808.2 (2020), 854.4 (2021), 846.6 (2022), 828.2 (2023), 878.8 (2024), 913.1 (2025), 975.2 (2026), 1,046.8 (2027), 1,098.5 (2028). ### Central bank summary (selected balances, billions of leks, end-period) - Net foreign assets (Bank of Albania): 402.0 (2019), 480.4 (2020), 556.0 (2021), 523.1 (2022), 512.4 (2023), 541.9 (2024), 560.5 (2025), 593.8 (2026), 632.5 (2027), 644.6 (2028). - Reserve money: 423.4 (2019), 434.0 (2020), 534.3 (2021), 565.2 (2022), 619.2 (2023), 653.7 (2024), 693.4 (2025), 735.9 (2026), 774.2 (2027), 815.7 (2028). - Currency in circulation: 275.3 (2019), 291.4 (2020), 344.6 (2021), 366.3 (2022), 387.7 (2023), 409.2 (2024), 432.1 (2025), 456.3 (2026), 482.2 (2027), 509.6 (2028). - Bank reserves: 148.1 (2019), 142.4 (2020), 189.7 (2021), 198.9 (2022), 231.5 (2023), 244.4 (2024), 261.3 (2025), 279.6 (2026), 292.0 (2027), 306.0 (2028). ### Financial soundness indicators (selected, end-period) - Regulatory capital as a percent of risk-weighted assets: 16.8 (Dec-14), 15.8 (Dec-15), 16.0 (Dec-16), 17.0 (Dec-17), 18.7 (Dec-18), 18.7 (Dec-19), 18.7 (Dec-20), 18.5 (Dec-21), 18.1 (Dec-22), 19.6 (Sep-23). - Regulatory Tier 1 capital as a percent of risk-weighted assets: 13.8 (Dec-14), 13.7 (Dec-15), 14.0 (Dec-16), 15.5 (Dec-17), 17.4 (Dec-18), 17.5 (Dec-19), 17.6 (Dec-20), 17.4 (Dec-21), 16.9 (Dec-22), 18.2 (Sep-23). - Nonperforming loans (gross) as a percent of total loans: 22.8 (Dec-14), 18.2 (Dec-15), 18.2 (Dec-16), 13.2 (Dec-17), 11.1 (Dec-18), 8.4 (Dec-19), 8.1 (Dec-20), 5.6 (Dec-21), 5.0 (Dec-22), 5.2 (Sep-23). - Liquid assets as a percent of total assets: 31.9 (Dec-14), 32.3 (Dec-15), 31.3 (Dec-16), 30.2 (Dec-17), 34.2 (Dec-18), 35.7 (Dec-19), 34.8 (Dec-20), 33.3 (Dec-21), 29.6 (Dec-22), 29.9 (Sep-23). - Return on equity (ROE, annual basis): 14.2 (Dec-14), 13.2 (Dec-15), 7.5 (Dec-16), 15.7 (Dec-17), 13.0 (Dec-18), 13.5 (Dec-19), 10.7 (Dec-20), 12.9 (Dec-21), 12.3 (Dec-22), 16.2 (Sep-23). - Customer deposits as a percent of total (non-interbank) loans: 180.2 (Dec-14), 187.8 (Dec-15), 192.8 (Dec-16), 194.0 (Dec-17), 203.2 (Dec-18), 207.2 (Dec-19), 211.3 (Dec-20), 213.6 (Dec-21), 212.4 (Dec-22), 215.7 (Sep-23). - Foreign currency-denominated loans to total loans: 62.4 (Dec-14), 60.8 (Dec-15), 58.6 (Dec-16), 56.4 (Dec-17), 56.1 (Dec-18), 51.2 (Dec-19), 50.3 (Dec-20), 51.1 (Dec-21), 51.4 (Dec-22), 47.5 (Sep-23). *Sources: Albanian authorities; and IMF staff estimates and calculations.* ### Annex I. Implementation of Article IV Recommendations ### Annex I. Implementation of Article IV Recommendations ### Fiscal Policy - Recommendation: A more ambitious fiscal consolidation, underpinned by a sound Medium-Term Revenue Strategy (MTRS), is vital for rebuilding room for policy maneuver. - Implementation and outcomes: - The outturn for 2022 and the estimated outturn for the 2023 Budget marked considerable consolidation with a reduction in the primary balance as a share of GDP of almost 3 percentage points. - The primary balance in 2023 is estimated to be zero, thus complying with the fiscal rules one year ahead of time. - The 2024 budget envisages a small primary surplus. - MTRS-related measures that had been adopted continued to be implemented, but the MTRS is now not expected to be finalized or adopted in 2023. - Subsidies and fiscal support: - Broad subsidies to the energy sector allocated under the 2022 Budget (1.3 percent of GDP) were fully disbursed. - Broad subsidies under the 2023 Budget allocated to the energy sector (0.5 percent of GDP) were not used amid a more favorable performance of the energy sector. - The 2024 Budget makes no allocation for broad subsidies to the SOEs. - Policy guidance: Fiscal support should be temporary and targeted to the vulnerable. ### Structural Fiscal Reforms and Fiscal Risk Management - Recommendation: The MTRS should be finalized and implemented as a cohesive strategy without further delay. - Implementation status: - Authorities continue to work on key measures identified in the draft MTRS but consider the draft needs updating to reflect current economic conditions. - Public investment management (PIM): - Comprehensive PIM guidelines introduced in December 2022 aim to review and rationalize project classifications, establish a prioritized project pipeline for large public investment projects, and enhance capacity building for project management and monitoring. - Authorities are reviewing the law on Public-Private Partnerships and have received Fund TA advice; timeline for completion and operationalization remains to be confirmed. - Fiscal risk management: - MoFE issued Instruction No.35 in December 2022 to improve fiscal risk management and disclosure and has strengthened the mandate of the Fiscal Risk Unit. - Authorities are on track to produce a more forward-looking and comprehensive fiscal risk assessment as a standalone document, independent of the budget document. - Budget amendments: - Normative acts were used to amend the 2022 budget on multiple occasions. - A normative act was passed to amend the 2023 Budget in October 2023. - Policy guidance: The use of normative acts to alter the budget should be minimized. ### Monetary Policy and Financial Sector - Recommendation: Monetary policy should continue to normalize while being nimble and data driven; further interest rate increases were warranted in the short term. - Implementation and outcomes: - The Bank of Albania (BoA) raised interest rates 5 times in 2022 and 2 times in 2023, by a cumulative amount of 275 basis points. - Authorities remain committed to being data-dependent in monetary policy decisions, while assessing monetary policy transmission and anchoring of inflation expectations. - Financial stability vigilance: - On-site and off-site inspections of the banking sector continued; financial soundness indicators are monitored and macro-prudential policies implemented. - Increased vigilance towards cyber risk with enhanced monitoring capacities within the banking system and the BoA. - Credit growth, FX lending, and sectoral risks: - The BoA has preserved capital buffers and foresees implementation of combined macroprudential capital buffers to be met by banks as of January 2024. - The AQR of systemic banks has not identified relevant capital shortfalls. - BoA adopted regulations to collect annual data on the real estate and construction sectors and enhance surveillance. - Finalized court procedures on the bailiff tariffs allow for full implementation of the bailiff reform. - Regulatory and supervisory alignment: - Engagement on EBA equivalence continued; BoA carried out an independent equivalence assessment demonstrating convergence with EU standards. - BoA aligned regulations to strengthen capitalization standards for banks, improved fit and proper requirements related to bank ownership, and conducted risk-based supervision. - Investment funds supervision: - AFSA established a Technical Committee overseeing Collective Investment Undertakings, increased monitoring of net repayments, liquidity, and stress test results, and increased reporting frequencies. - Policy guidance: Enhanced vigilance is vital as monetary conditions tighten and the financial landscape changes; close monitoring and management of risks from sizable credit growth, rising FX lending, and real estate/construction sector developments remain essential. ### Governance Reforms, Climate, Labor, and AML/CFT - Judicial and anti-corruption: - Recommendation: Ongoing efforts related to judicial reforms and combating corruption should continue. - Implementation: Vetting of judges has been 90 percent completed. The draft National Anticorruption Strategy is now expected by the end of 2023. - Climate integration: - Recommendation: Climate adaptation policies should be integrated into national decision processes and costed in medium-term planning and annual budgets. - Implementation: Albania is implementing the National Climate Change Strategy 2020–2030. A Council of Ministers’ decision in February 2023 adopted a framework to integrate climate action into decision-making and budgetary processes. - Human development and informality: - Recommendation: Efforts to address human development needs and reduce informality should be stepped up. - Implementation: Albania started implementation of the Youth Guarantee Program and national employment promotion programs to reduce NEET and retain young labor force. - AML/CFT: - Recommendation: Efforts to exit FATF’s grey list and reaffirm commitment to a robust AML/CFT framework should continue. - Implementation: Albania made substantial progress on AML/CFT rules and regulations; FATF removed Albania from the list of countries under increased monitoring in their plenary meeting on October 2023. ### Annex II — Public Wage Developments: Key Findings and Risks - Comparative positions and recent trends: - Albania has the lowest private and public sector wages among Western Balkan countries. - As of 2022, the average gross monthly public sector wage in Albania was approximately 30 percent lower than in other Western Balkan economies, both in nominal and PPP adjusted terms. - Private sector real wage growth in 2022: 10.2 percent. - Public sector real wage growth in 2022: 1.9 percent. - Public wage bill and fiscal ratios: - Albania’s public sector wage bill: 4.5 percent of GDP. - Average public wage bill across other Western Balkan economies: 10 percent. - Albania’s public sector wage bill as a percentage of government revenue: 16.7 percent. - Average for other Balkan countries as percentage of government revenue: 27 percent. - Recent public sector wage reform: - Authorities announced intention to raise the average salary by 40 percent to EUR 900; reform announced and implemented in April—June 2023. - Reform introduces a revised wage structure rewarding longer careers and decompression within the wage structure. - Wages will be indexed to the average annual inflation rate at least every two years starting in 2026, with a cap set at the inflation target established by the Bank of Albania, plus one percentage point. - Implementing this policy measure is expected to result in a roughly 30 percent increase in the public sector wage bill by 2026. - Macroeconomic risks and competitiveness: - Risk: Large public sector wage increases may spill over to economy-wide wage increases and raise underlying inflation, especially when labor markets are tight and the economy operates at or above potential. - IMF staff estimate: Main impact on inflation expected for 2024–2 5, raising inflation by about half a percentage point in both years. - Competitiveness risk: Unless offset by productivity gains, sustained higher wage growth and inflation imply potential loss of competitiveness. - In 2022, annual wage growth outpaced annual productivity growth. - Output per worker in Albania is around 37 percent below the levels of BIH, MKD, SRB, and 57 percent below the levels of MNE. - Policy recommendations: - Ensure recent public sector wage increases do not jeopardize medium-term fiscal consolidation objectives by accompanying them with additional revenue measures and improvements to public sector efficiency. - Strengthen PFM reforms to enhance transparency and oversight on public wage setting by integrating wage policies into the budgetary framework and promoting payment-related digitalization. - Consider introducing a well-designed performance-based pay component rather than increasing public wages solely by job tenure. ### Annex III — Long-Term Exchange Rate Determinants: Findings - Objective: Examine long-term drivers of real exchange rate appreciation using a panel of European and Western Balkan countries and country-specific ARDL for Albania. - Fundamental drivers identified: - Supply-side: Productivity gains in the tradable sector (productivity relative to trading partners) are a key determinant of REER appreciation. - Demand-side: Improvements in the terms of trade and output per capita growth relative to trading partners contribute to REER appreciation; trade openness tends to depreciate the REER. - Albania-specific structural factors: Development of tourism and FDI inflows financing construction (a non-tradable sector) are correlated with REER appreciation. - Empirical approach: - Panel with quarterly data from 1997Q1 to 2023Q1 used; panel cointegration tests (Kao, Pedroni, Westerlund) support cointegration between REER and explanatory variables. - Cointegrated panel estimated with dynamic OLS (Stock and Watson 1993). - ARDL model for Albania explicitly considered FDI, remittances, and tourism exports. - Estimation results (summary): - Productivity relative to trading partners: positive and significant long-run determinant of REER. - Terms of trade improvement: positive contributor to REER appreciation. - GDP per capita growth relative to trading partners: contributes to appreciation (coefficient very small). - Trade openness: tends to depreciate the REER. - Net foreign assets, government expenditure relative to trading partners, and FDI inflow: not significant in the panel estimation. - ARDL (Albania): productivity relative to trading partners confirmed as key determinant; tourism exports contribute to appreciation (significant at 10 percent); FDI not significant when CPI is included (but becomes significant when CPI is not included). - Policy implication: The exchange rate should be kept as a shock absorber, even in the face of episodic deviations from fundamentals exemplified by recent accelerated lek appreciation. *Source: Annex I. Implementation of Article IV Recommendations.* ### 5. The estimated REER does fit quite well the actual movements in the REER. As regards ### 1albea2024001 - 5. ### External Position: Overall Assessment - The external position of Albania in 2022 was moderately weaker than the level implied by fundamentals and desirable policies. - EBA-Lite CA-model results indicate a current account gap of 1.1 percent of GDP, implying a REER overvaluation of 4 percent. - The current account deficit narrowed in 2022 compared to 2021, mainly due to a strong increase in the services balance. - Risks: significant external financing needs, an increasing share of commercial financing in overall external debt, a still large negative albeit narrowing NIIP, and tighter global financial conditions. - Mitigants: foreign direct investment (FDI) flows, sufficient foreign reserve coverage, and significant official financing. - Potential Policy Responses: enhance domestic savings with emphasis on fiscal consolidation; address structural weaknesses (governance concerns, inadequate infrastructure, shortages of skilled labor) to support transition toward export-oriented growth. *Source: IMF staff calculations and estimates.* ### Foreign Assets and Liabilities: Position and Trajectory - Background: NIIP declined to -43 percent of GDP by end-2022, compared to -50.5 percent of GDP by end-2021. - Improvement drivers: higher nominal GDP growth and strong appreciation of the lek. - Foreign liabilities: approximately 104 percent of GDP, with more than half comprising direct investment. - International reserves: accounted for 27 percent of GDP. - Comparative note: NIIP at end-2022 slightly deteriorated relative to 2018 and 2019, but improved relative to 2020 and 2021. - Assessment: level and composition indicate external position is sustainable, but liability profile exposed to rollover risks from larger-than-expected interest rate hikes and possible reversal of exchange rate appreciation. - Risk mitigation: around half of public external debt held by multilateral institutions and bilateral development agencies. - Key 2022 aggregates (percent of GDP): NIIP: -43; Gross Assets: 57; Debt Assets: 16; Gross Liab.: 108; Debt Liab.: 43. ### Current Account - Background: Current account deficit decreased to 6 percent of GDP in 2022, driven by robust tourism inflows. - Offsets: deterioration in the trade balance from increased imports of goods due to higher international prices and strong private demand. - 2023: current account balance in the first three quarters reached a small surplus and outperformed the same period in 2022; Q4 expected weaker but full-year 2023 expected to improve further. - Medium-term outlook: expected improvement sustained by strong tourism inflows. - Vulnerabilities: susceptibility to external shocks, including weather-related disruptions (dependence on hydropower), reliance on tourism and remittances. - Assessment (EBA-Lite Current Account approach, 2022): cyclically adjusted CA norm estimated at -4.8 percent of GDP; cyclically adjusted CA balance is -5.9 percent of GDP; estimated CA gap of -1.1 percent of GDP suggests REER overvalued by 6.2 percent. ### Real Exchange Rate - Background: Between 2017 and end-2022, REER appreciated by about 11 percent. - Drivers: price differentials vs. trading partners, significant strengthening of nominal exchange rate, long-term factors including robust FDI flows and tourism. - 2022 dynamics: Q1 2022 yearly depreciation amid war in Ukraine and commodity price increases, with reversal toward end-2022 and considerable REER appreciation. - 2023 nominal exchange rate: appreciated by around 11 percent in the first 11 months of 2023 alongside tourism arrivals and FDI flows. - Assessment: IMF staff CA gap estimate of -0.3 percent of GDP implies a REER gap of 1.1 percent (elasticity 0.3). REER model suggests a gap of 6.2 percent. Decrease in estimated REER overvaluation compared to 2021 driven by steady increase in tourism inflows and FDI. - Albania: EBA-lite Model Results, 2022 (in percent of GDP) - CA-Actual: -6.0 - Cyclical contributions (from model): (-)-0.1 - COVID-19 adjustors: (-) 0.0 - Additional temporary/statistical factors: (-)0.0 - Natural disasters and conflicts: (-)-0.1 - Adjusted CA: -5.9 - CA Norm (from model) 1/: -4.8 - Adjustments to the norm: (-)0.0 - Adjusted CA Norm: -4.8 - CA Gap: -1.1-1.6 - o/w Relative policy gap: 2.9 - Elasticity: -0.3 - REER Gap (in percent): 4.06.2 1/ Based on the EBA-lite 3.0 methodology 2/ Cyclically adjusted, including multilateral consistency adjustments. ### Capital and Financial Accounts: Flows and Policy Measures - Background: Net financial inflows dominated by FDIs, which represented about 7.5 percent of GDP in 2022. - Characteristics: FDI inflow is quite stable; portfolio flows more volatile, offsetting FDIs and reserve accumulation. - Assessment: FDI inflows linked to construction sector and tourism-related investment projects; expected to expand further supporting steady capital inflows. - Risk: tightening global financial conditions could hinder financing from nonresidents. ### FX Intervention and Reserves Level - Background: Gross FX reserves reached about 27 percent of GDP and 187 percent of the ARA metric at end-2022. - Composition: considerable portion comprises FX deposits held by commercial banks at the Bank of Albania. - Excluding commercial banks' FX reserves: gross reserves were 23 percent of GDP and 157 percent of the ARA metric as of end-2022. - Assessment: Reserves adequate relative to various criteria, including the ARA metric. - Policy guidance: exchange rate should continue to act as shock absorber; FX interventions should be limited to dealing with disorderly FX market conditions. - Additional note: ability to attract new FDI flows and refinance commercial external debt pivotal for external sustainability and growth. ### Authorities’ Views - Authorities generally concurred with staff's assessment of Albania's external position. - They emphasized recent developments may represent an important transition likely to strengthen Albania’s external position in line with improved fundamentals. - Agreed that continued structural reforms and continuously prudent fiscal policy could help enhance competitiveness and support a stronger external position. ### Risk Assessment Matrix (selected risks, likelihood, impact, and policy responses) - Commodity price volatility - Likelihood: High - Impact: High - Policy responses: - Adjust the pace of monetary policy tightening and clearly communicate the BoA’s strategy. - Adopt additional but temporary and targeted income support to the poor and vulnerable. - Gradually adjust electricity tariffs to cost recovery levels and preserve price mechanism. - Reinvigorate energy sector reforms to restore financial viability of energy sector SOEs. - Prepare a backup power supply plan. - Intensification of regional conflict(s) - Likelihood: High - Impact: Medium - Policy response: implement policies to cope with commodity price shocks (see above). - Abrupt global slowdown or recession in Europe - Likelihood: Medium - Impact: High - Policy responses: - Adjust pace of fiscal consolidation within a credible revenue-based medium-term plan and seek additional official financing. - Better target fiscal support. - Closely monitor and manage fiscal and financial sector risks. - Adjust pace of monetary tightening and clearly communicate the BoA’s strategy. - Improve business environment to support growth and investment. - Monetary policy miscalibration - Likelihood: Medium - Impact: Medium - Policy responses: - Pace of monetary normalization should be data driven and readily adjust to evolving conditions. - Clearly communicate the BoA’s strategy. - Extreme climate events - Likelihood: Medium - Impact: High - Policy responses: - Assess vulnerability to natural disasters and adopt adaptation and mitigation measures; consider a comprehensive disaster resilience strategy. - Gradually adjust electricity tariffs to cost-recovery levels and preserve price mechanisms. - Prepare a backup power supply plan. - Cyberthreats - Likelihood: Medium - Impact: Medium - Policy responses: - Continue implementation of measures from 2022 IMF technical assistance to reduce cyber-attack risk to banking system and government institutions. - Effectively implement AML/CFT measures related to VA/VASPs to mitigate sectoral risks. - Exchange rate volatility (domestic risk) - Likelihood: Medium - Impact: High - Policy responses: - Tighten macroprudential regulation to reduce systemic shock risk to financial sector. - Devise temporary measures to ease liquidity problems for exporting firms. - Rollover of public debt (domestic risk) - Likelihood: High - Impact: High - Policy responses: - Diversify the debt holder base and lengthen maturity. - Improve market communication and coordination with the central bank. - Accelerate revenue-based fiscal adjustment and debt reduction. - Seek additional official financing. ### Sovereign Risk and Debt Sustainability Highlights - Overall near-term and medium-term risk assessments: Moderate. - Debt stabilization in the baseline: projected debt path expected to stabilize and GFNs will remain at manageable levels conditional on implementation of fiscal adjustment measures assessed as feasible though not yet legislated. - Assessment: Debt is sustainable with high probability (noting some text indicating "sustainable but not with high probability" and later "debt is assessed as sustainable with high probability" in related passages). - Key vulnerabilities: - Substantial gross financing needs (GFN) averaging around 18 percent of GDP in 2023-2028. - High rollover needs due to considerable share of short-term debt; as of end-2022, debt with remaining maturity of less than one year accounted for over a quarter of outstanding debt. - Large amortizations forthcoming (a large one due in 2025) make medium-term assessment less favorable than near term. - Structural demographic risks: continued emigration, falling birth rate, and aging population likely to lead to declining revenue and rising spending pressures, including pension obligations with the pension system already in deficit. - Policy priorities: implement the Medium-Term Debt Management Strategy to increase average maturity of public debt and pursue more ambitious medium-term fiscal consolidation. *Italic: Source: IMF staff calculations and estimates.* ### Annex VI. Figure 2. Albania: Debt Coverage and Disclosure ### Annex VI. Figure 2. Albania: Debt Coverage and Disclosure ### 1. Debt coverage in the DSA - Coverage label shown: "1/CGGGNFPSCPSOther" - 1a. If central government, are non-central government entities insignificant? n.a. ### 2. Subsectors included in the chosen coverage in (1) above - Subsectors captured in the baseline — Inclusion - 1 Budgetary central government: Yes - 2 Extra budgetary funds (EBFs): No - 3 Social security funds (SSFs): No - 4 State governments: No - 5 Local governments: Yes - 6 Public nonfinancial corporations: No - 7 Central bank: No - 8 Other public financial corporations: No ### 3–4. Instrument coverage and accounting principles - (Figure headings present: "3. Instrument coverage:" and "4. Accounting principles:" — no specific instrument or accounting details are provided in the source extract.) ### 5. Debt consolidation across sectors - Color code legend referenced: █ chosen coverage █ Missing from recommended coverage █ Not applicable - Holder / Issuer consolidation entries (values shown as in source): - 1 Budget. central govt 0 - 2 Extra-budget. funds 0 - 3 Social security funds 0 - 4 State govt. 0 - 5 Local govt. 0 - 6 Nonfin pub. corp. 0 - 7 Central bank 0 - 8 Oth. pub. fin. corp 0 - Total 000000000 - Consolidation and valuation labels present (as in source): Consolidated, Market value 7/, Oth acct. payable 2/, Non-consolidated, CPS, NFPS, GG: expected, CG, Non-cash basis 4/, Cash basis, Nominal value 5/, Face value 6/ - Comments (verbatim text from source): - "The debt of state-owned enterprises (SOEs) are not included in the public debt but guarantees provided by the government to SOEs are reported. Albania has no subnational state governments." - "Total" - Reporting on intra-government debt holdings headings present (as in source): Nonfin. pub. corp., Central bank, Oth. pub. fin corp, Budget. central govt, Extra-budget. funds, Social security funds, State govt., Local govt., NFPS, GG: expected ### Explanatory notes and definitions (as presented in the figure) - "1/ CG=Central government; GG=General government; NFPS=Nonfinancial public sector; PS=Public sector." - "2/ Stock of arrears could be used as a proxy in the absence of accrual data on other accounts payable." - "3/ Insurance, Pension, and Standardized Guarantee Schemes, typically including government employee pension liabilities." - "4/ Includes accrual recording, commitment basis, due for payment, etc." - "5/ Nominal value at any moment in time is the amount the debtor owes to the creditor. It reflects the value of the instrument at creation and subsequent economic flows (such as transactions, exchange rate, and other valuation changes other than market price changes, and other volume changes)." - "6/ The face value of a debt instrument is the undiscounted amount of principal to be paid at (or before) maturity." - "7/ Market value of debt instruments is the value as if they were acquired in market transactions on the balance sheet reporting date (reference date). Only traded debt securities have observed market values." *Source: Annex VI. Figure 2. Albania: Debt Coverage and Disclosure (excerpt).* ### 7. There are several other schemes in place: ### 1albea2024001 - 7. There are several other schemes in place: ### Pension schemes and coverage - The Social pension: - Provides a minimum income to those not entitled to a statutory pension scheme. - Eligibility: aged at least 70, resident for five years in the country, and meet means-testing criteria. - Less than 2,000 individuals currently receive this social pension. - The retirement age is rising to 67 by 2056, narrowing the gap between social pension eligibility and retirement. - Current minimum age to be eligible (70) is high compared to the age of retirement, creating pressures on other safety nets for those aged below 70 with no other income. - Public voluntary pension scheme: - Provides optional coverage for workers not covered by the statutory pension scheme (for instance unemployed or informal work). - Mainly used by persons with large gaps in their contribution history, due to migration or unemployment. - Supplementary scheme: - Provides additional benefits on top of statutory pensions for senior officials, public servants, military and police officers, secret service officials and fire-fighters, miners and persons working in the oil and gas industry. - Financed from overall contributions. - Heavily tilted to higher pensions: represents on average more than 10 percent of pensions received by pensioners in the highest decile, compared to less than 1 percent for other deciles. ### Voluntary private pensions and tax incentives - The government has encouraged voluntary participation in private pension funds with tax exemptions and higher deductible expenses for employers enrolling employees. - Concerns and trade-offs: - Voluntary private pension schemes can raise concerns of deadweight and regressive effects when associated with tax exemptions. - They generally do not address lack of contributions among lower income groups and create windfall effects. - Countries with small domestic capital markets face challenges due to critical size of capital and financial markets and currency issues. - Well-regulated, transparent and efficient schemes can increase future entitlements and reinforce the link between contributions and entitlements. - Tax exemptions for voluntary schemes must be calibrated carefully. ### Pension finances, projections, and risks - 2022 fiscal snapshot: - Pension spending accounted for 6.1 percent of GDP in 2022. - Pension revenue accounted for 5 percent of GDP in 2022. - Resulting deficit of around 1 percent of GDP in 2022. - Near-term and medium-term risks: - Deficit could improve in 2023 due to recent minimum wage increases, but there are risks the deficit could widen in the medium-term. - Revenue base is weakened by informality, unemployment and inactivity. - Spending side likely to shift towards more non-contributory benefits as current working age generations reach retirement. - Projections: - Latest available projections (done in 2014) expected a gradual reduction of the deficit until 2042, a surplus between 2043 and 2057, and a deficit after 2057 at a moderate level of 0.5 percent of GDP (Ministry of Social Welfare and Youth, 2014). - A new projection exercise with World Bank support, acknowledging recent trends, should be available in 2024. ### Replacement rates, pension levels, and poverty - Aggregate replacement rate: - The aggregate replacement rate (ratio of average pension to average wage) is at 34 percent. - Comparable to regional peers. - Pension amounts: - On average, pensioners receive a pension of 19,000 ALL (about $200 dollars) per month. - Lowest decile average: 8,500 ALL per month. - Highest decile average: ALL 38,000 per month. - Social pension level and coverage: - The social pension was at ALL 8,588 in 2022, approximately one fourth of the minimum wage. - It pertained to a limited part of the population in 2017 (less than 1 percent of pensioners in 2017), given strict eligibility criteria and that most of the age group then had a full career. - Poverty patterns: - The poverty rate among the 65+ population is lower than among other age groups. - This is partly due to wide eligibility of pensions among the elderly and to the level of current pensions, inherited from former eligibility and benefit calculation rules. - Albania stands out compared to most European countries where elderly poverty is closer to or higher than overall population poverty. - Contribution duration trends and implications: - It is likely more people will be entitled to partial pensions, social pensions, or no pension in the future due to insufficient duration of contribution. - While in 2012 people who retired had contributed for 35 years on average, those who retired in 2022 contributed for 27 on average. - The aggregated replacement rate could decrease, raising concerns about the threat of poverty among the elderly. ### Policy considerations and recommendations - Priority: address weak coverage among the working age population. - Options to maintain incentives for working age adults to comply with contributions could be considered. - Maintain the contribution rate in a reasonable bracket. - Possibly conduct studies to understand whether a shorter vesting period could incentivize more employees to contribute. - Ensure alignment of future pensions with past contributions to avoid disincentives to participate. - Voluntary private pension plans: - Voluntary private pension plans, possibly with auto-enrollment, have proven to be a good channel in some countries to incentivize participation and increase financial inclusion. - Related tax exemptions must be handled with caution as they limit revenue and have questionable impact on enrollment. ### Annex IX — Foreign Exchange Intervention (FXI): cases and assessment - Context: - Albania is a highly euroized small open economy with low financial intermediation. Roughly half of banking sector deposits and loans in 2022 were denominated in FX. - Since 2015 Albania experienced steady appreciation of the exchange rate with respect to the Euro and the Dollar, sharply accelerated since late 2022, prompting demands for FX intervention. - FXI as a policy lever: - FXI is one of several levers; monetary and fiscal policy, macroprudential measures and capital flow management should be considered. - Under the Integrated Policy Framework (IPF), FXI should be limited to cases where frictions limit efficacy of other measures. - Past stance: - The Bank of Albania (BoA) largely refrained from interfering; Fund advice was to let the exchange rate act as a shock absorber and limit FX interventions to disorderly conditions. - Recently, BoA has intervened and increased magnitude and frequency of planned FX interventions. - Three specific cases under the IPF where FXI may be appropriate: A. Shallow FX Markets - FXI may smooth large changes in hedging and financing premia that generate risks to macroeconomic and financial stability. - Assessment: FX markets are shallow in Albania, although volume has been increasing recently; UIP premia are quite stable and roughly in line with emerging market averages; appreciation since 2015 has not created significant increases in premia. B. FX Mismatches - If large depreciation increases financial stability risks from FX mismatches, FXI can help prevent adverse financial amplification, provided reserves are sufficient. - Assessment: Share of loans in FX is still large with a sizable share of FX unhedged loans; FXI should not be preemptive and used only when sudden depreciation materializes; macroprudential measures appear more appropriate to mitigate risk. C. Price Stability - FXI can support monetary policy when large depreciation may de-anchor inflation expectations, provided costs and reserve conditions are favorable; FXI can also lean against sustained appreciation. - Assessment: Econometric analysis indicates different inflation passthrough for appreciation vs depreciation. For Albania, the passthrough is quite low in case of appreciation, with an estimated elasticity of 0.05 (sum of the direct effect and the interaction term). - Box estimate: - The Box reports that 1 percent appreciation episodes would lead to a reduction of inflation of about 0.09 percent. When considering inflation expectations, the passthrough is never statistically significant. - Overall conclusion (Annex IX): - Albania does not seem to meet the conditions warranting a more active use of FXI in the current macroeconomic context. - No large capital flow shocks justify FXI even given shallow FX markets and unhedged FX loans. - Appreciation is not accompanied by jumps in UIP premia or large shocks to the capital and financial account. - Risks could be better addressed by reducing euroization and strengthening macroprudential regulation. - FXI could be warranted if there are signs of de-anchoring of inflation expectations from rapid appreciation and if the cost of responding with monetary policy alone is high while the cost of FXI is low; IMF staff analysis shows passthrough from appreciation to inflation is relatively small. ### Annex X — Monetary transmission in euroized countries (implications for Albania) - Euroization and monetary transmission: - The level of euroization in Albania has historically been high; share of the financial sector operating in euros—measured by euro-denominated loans and deposits—has broadly remained around 50 percent. - Euroization extends beyond the financial sector with certain goods and services reportedly priced and transacted in euros. - Empirical findings and model results: - A Bayesian structural vector autoregressive model was used to quantify the impact of euroization on monetary transmission. - Past empirical analyses suggest dollarization/euroization is negatively correlated with strength of monetary policy transmission and positively correlated with inflation volatility; reduced euroization tends to increase monetary policy effectiveness. - The impact of monetary policy shocks on macro variables decreases with the level of euroization: - In euroized countries, the response of output to a 100 basis points increase in the policy rate can be as much as three percentage points weaker compared to a control group. - For inflation, the gap in response to a monetary policy shock can be as much as 1.5 percentage points. - In Albania, a 100 basis point increase in the interest rate can be expected to bring about a 15 percent decline in output and a 1.8 percent decrease in prices; responses dissipate after one quarter and confidence intervals can be relatively large for some countries including Albania. - Policy implication: - Findings confirm the important role of monetary policy in Albania and the need to continue de-euroization efforts to improve monetary policy effectiveness. *Source: Content unit 1albea2024001 (PDF chapter/section).* ### Annex X. Box 1. A Bayesian Structural Vector Autoregressive Model with Sign Restrictions ### Annex X. Box 1. A Bayesian Structural Vector Autoregressive Model with Sign Restrictions ### Model specification and identification - System of linear equations as reported: - 푨푨 ퟎퟎ 풀풀 풊풊 =∑ 푗푗=1 푝푝 푨푨 풋풋 풀풀 풊풊−풋풋 +휺휺 풋풋 , where 푡푡=1,2 , ...푇푇. - 휺휺 풊풊 is a vector of exogeneous structural shocks and 휺휺 풊풊 ~푖푖.푖푖.푑푑. (ퟎퟎ,푰푰 풏풏 ). - 푨푨 풋풋 is the matrix of parameters with 퐴퐴 0 invertible. - Lag length 푝푝 = 4. - Endogenous variables: - 푿푿 푡푡 = [푦푦 푡푡 , 푝푝 푡푡 , 푟푟 푡푡 , 푒푒 푡푡 ] where: - GDP (푦푦 푡푡 ) = Seasonally adjusted real GDP. - inflation (푝푝 푡푡 ) = Harmonized Index of Consumer Prices. - interest rate (푟푟 푡푡 ) = policy rate (one-week policy rate for Albania). - exchange rate (푒푒 푡푡 ) = nominal effective exchange rate. - Identification: - Sign restrictions were imposed on monetary policy, supply, and demand shocks. - Exchange rate shocks were later included as a robustness check. - Sample and data: - Six euroized countries and two non-euroized countries as a control group. - Quarterly data from 2010 to 2022. ### Key empirical findings on transmission channels (Albania) - General assessment: - The picture for transmission channels for Albania is mixed and data limitations call for some caution in interpreting some of the coefficients. - Exchange rate channel: - The exchange rate is responsive to monetary policy shocks, but the responsiveness is partly hampered by euroization. - Interest rate and credit channels: - The nonnegligible share of flexible rate mortgages (over one-third) implies a high elasticity of rates on outstanding mortgages. - Given the low level of credit penetration, the interest rate and credit channels are likely to be limited. - Digging deeper into credit market segments suggests a higher pass-through of interest rate changes to non-financial corporation loans compared to mortgage loans. - Data limitations: - The lack of granular financial market data may have limited the possibility of isolating pure monetary policy shocks that had not been factored in by the markets. ### Robustness and auxiliary analyses - Exchange rate shocks were included as a robustness check. - Cross-country comparisons and pass-through metrics were computed (figures reported in source), indicating heterogeneous pass-through across countries and loan types. ### Annex XI (related empirical policy application): Female labor force participation in Albania - Aggregate participation and gender gap: - In 2010, about 54 percent of women aged 15–64 participated in the labor market. - In 2022, female labor force participation reached 66.7 percent. - In 2022, the gap in labor force participation between men and women was more than 13 percentage points. - The gender gap is slightly smaller than in other Western Balkan countries (by about 2 percentage points) but about 5 percentage points larger than the EU-27 average. - Education-related differences: - Participation rate for women with tertiary education is only marginally lower than for men with the same education level. - The gender labor force participation gap for women with upper secondary education is above 20 percentage points. - Women with lower than upper secondary education display a gender gap of about 10 percentage points. - In 2022 women with upper secondary education or lower represented more than 80 percent of women between 40 and 64 years of age. - Regional heterogeneity: - The gender force participation gap ranges from more than 20 percentage points in some prefectures to below 5 percentage points in others. - The gender gap is slightly correlated with total labor force participation. - There is no clear correlation with regional value added per capita. - Other gender gap dimensions (selected statistics, 2018): - Difference in earnings: 7.5 percent lower hourly earnings than men. - Hours employed: 10 percent less hours worked in a week. - Occupational composition: male managers are double the number of female managers. - Policy-relevant macro impact estimates: - Closing the female labor force participation gap would boost the level of GDP by 5 percent. - Closing the wage gap, the hours worked gap, and the occupational difference would result in an increase in the level of GDP by 10 percent. *Source: 1albea2024001 - Annex X. Box 1. A Bayesian Structural Vector Autoregressive Model with Sign Restrictions* ### 6. Better targeted support and gender-aware policies could improve female labor market ### 6. Better targeted support and gender-aware policies could improve female labor market ### Current spending and participation - IMF staff calculations indicate that Albania spent just 0.7 percent of the 2022 budget on active labor market policies. - Draft 2024 budget: gross spending on labor market and VET policies stands at 0.09 percent of the 2024 budget. - Only 1 percent of women participate in active labor market programs. ### Constraints and implications - Education attainment alone cannot provide the needed increase in female labor force participation or reduce the gender wage gap. - Care needs in Albania are met mainly by women, which constrains female labor force participation. ### Policy recommendations and priorities - Strengthen the support system for children and the elderly through the expansion of institutional services. - Increase access to childcare services and after school programs to alleviate care burdens that fall disproportionately on women. - Better target active labor market programs to raise female participation beyond the current 1 percent. *Source: 1albea2024001 - 6. Better targeted support and gender-aware policies could improve female labor market* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1albea2024001.pdf_