## On June 7, 2004, the government of Albania publicly presented its second Annual Progress Report (APR-2)

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**Canonical URL:** [On June 7, 2004, the government of Albania publicly presented its second Annual Progress Report (APR-2)](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04205.pdf)

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---

### Overview and overall assessment
- APR-2 analyzes the second year of implementation of the National Strategy for Socio-Economic Development (NSSED).
- Joint staff assessment (JSA) of PRSP and first APR identified shortcomings posing risks to successful implementation; APR-2 shows substantial improvements in some areas but weaknesses remain that limit effectiveness of the NSSED as a vehicle for sustained poverty reduction.
- Government actions noted:
  - Raised public awareness of NSSED through national, widely-publicized fora.
  - Better linked reforms across MDGs, SAA negotiations, and NSSED.
  - Strengthened monitoring and evaluation functions within key line ministries and defined indicators (see annex to APR-2).
  - Established and fully staffed Department of the NSSED (DoNESSED) within the Ministry of Finance to coordinate NSSED activities.
  - More active donor engagement and improved donor coordination.

### Updated poverty diagnostic
- Data sources used: Living Standard Measurement Survey (LSMS), 2001 census, IDA Poverty Assessment (2003).
- Key statistics and findings:
  - One quarter of the Albanian population—or close to 780,000 individuals—live in poverty, even after receipt of income transfers.
  - Less than 5 percent of the population are in extreme poverty (unable to meet basic food requirements).
  - About one-third of the population lacks access to two or more basic necessities such as basic education, water, sanitation, or heating.
- Analytical conclusions:
  - Diagnostic validates government focus on economic growth plus priority investments in education, healthcare, and infrastructure.
  - Patterns point to inadequate aggregate demand for labor—particularly skilled labor—indicating need for a broadly based program to foster poverty-reducing growth.
  - Income poverty is often compounded by non-income deprivations; quality and access problems in health and education require sectoral investments.
- Gaps and recommendations:
  - Data insufficient to reliably assess income distribution trends; further work and analysis encouraged.
  - Measures to address poverty among specific social groups (e.g., Roma, self-identified Egyptians, young families, youth at risk) need clearer priority actions and sectoral targeting.
  - Spatial targeting of regional poverty requires more discussion linking diagnostics to proposed priority actions.

### Implementation and updating of the strategy
- Coverage and shortcomings:
  - APR-2 provides adequate information about 2003 developments but lacks detailed analysis of:
    - Remaining weaknesses in NSSED implementation.
    - Links between shortfalls in budgetary revenues and realization of programmed investments.
    - Factors contributing to the large informal economy and high fiscal evasion.
  - Public priority actions listed for the year are not clearly linked to initial NSSED priority actions nor to criteria explaining their adjustment over time.

### Macroeconomic and fiscal framework
- 2003 macro performance (as presented):
  - Real GDP growth recovered to an estimated 6 percent in 2003.
  - Inflation was kept within the authorities’ target range.
  - Current account deficit was reduced.
  - Further steps towards fiscal consolidation occurred.
- Observations and cautions:
  - APR-2 associates recovery with increased private investment and improved business climate (partly attributed to FIAS-related reforms), but these attributions may be optimistic given lack of reliable recent data.
  - Improved hydrological conditions increased electricity production by 50 percent in 2003 relative to 2002; APR-2 does not sufficiently acknowledge this contribution.
  - Privatization of the largest commercial bank in 2004 highlighted as positive for financial deepening.
- Debt and fiscal risks:
  - Albania’s debt position appears sustainable over the medium-term but risks identified include: cost of domestic borrowing, large trade deficit, potential decline in remittances, and low level of Foreign Direct Investment.
  - A comprehensive sustainability assessment remains to be done.
- Budgeting, expenditure, and revenue issues:
  - APR-2 lacks an updated medium-term macroeconomic framework and weakly links NSSED to the Medium Term Budget Plan (MTBP) and annual budget cycle.
  - Annexes outline policies through 2007 but often do not present policy costs or integration into the MTBP.
  - Despite some revenue gains, 2003 revenue ratio is still lower than in 2000; fiscal revenue has not risen faster than nominal GDP in all recent years.
  - Expenditure cuts in 2003—equivalent to 2 percent of GDP—are not discussed regarding impacts on priority expenditure and investment.
  - APR-2 does not discuss use, in 2004, of half of the funds from privatization of the National Savings Banks for urgent priority investments in health, education and infrastructure.
  - APR-2 fails to mention indexation of government wages to inflation introduced in early-2004—a source of medium-term fiscal risk.
- Institutional recommendations:
  - Greater emphasis needed on public expenditure management and procurement reforms, possibly drawing on a recent ROSC.
  - DoNSSED progress in collaborating with the Budget Department is noted; authorities urged to accelerate efforts during preparation of the 2005 annual budget.
  - Improved mobilization of domestic resources should be emphasized in APR follow-up.
  - Need to evaluate and rank investment projects better, prioritizing those with identifiable concessional financing and subjecting projects to feasibility analysis and debt sustainability considerations.

### Structural and sectoral policies
- Crosscutting progress and remaining needs:
  - APR-2 gives better attention than APR-1 to governance, gender issues, and decentralization.
  - Spending priorities remain aligned with initial NSSED, with some improvement in intra-sectoral prioritization but continued need for cross-sectoral prioritization mechanisms.
- Governance and public administration:
  - Inclusion of measurable indicators of six key governance dimensions is positive though some targets are very ambitious.
  - APR-2 does not highlight establishment of the High Inspectorate (HI) as an anti-corruption tool and notes urgent need for adequate HI funding.
  - Public administration reform priorities for 2004–07 are appropriate but need more emphasis on public expenditure management and procurement.
  - Rapid decentralization requires civil service reforms at the local level.
  - Legal and judicial reforms suffer from a legislative logjam and need improved legislative drafting; execution/bailiff service improvements remain incomplete.
- Social protection and labor:
  - 2003 reforms: social insurance (contribution rates, harmonization of urban/rural schemes) and social assistance program reforms; improvements in targeting poorest observed.
  - New plans/draft laws aim to:
    - Link eligibility for cash social assistance benefits to availability for community work (to tighten income testing and promote financial independence).
    - Provide legal and financing framework for potential expansion of social services.
  - Implementation effectiveness and impact require careful monitoring.
  - Decision to protect vulnerable groups from electricity tariff increases; implementation not expected until mid 2004.
  - Labor market difficulties persist—particularly inadequate formal sector jobs—requiring broad economic and governance reforms; APR-2 places too much emphasis on job creation through active labor market programs.
- Pensions, education, health:
  - Pension reforms: incremental progress with measures to introduce clear rules for pension levels and changes in social insurance collection arrangements.
  - Education: numerous 2003 initiatives (administration efficiency, curriculum reform, improved enrolment) but implementation is nascent; more analysis needed and output/outcome indicators are missing. Adoption of a sector-wide strategy expected in the year should address gaps.
  - Health: public sector spending on health increased from 2.1 percent of GDP to 2.4 percent; targeted increases for operation and maintenance in primary health care. National HIV/AIDS Strategy and Health Promotion Strategy adopted; medium-term health sector reform strategy being finalized. APR-2 does not clearly outline priority sectoral reforms or measurable indicators and targets for implementation.

### Energy, financial sector, and statistics
- Electricity sector:
  - Recovery from 2000 crisis through multi-year Action Plan and Power Sector Policy Statement; performance targets met in twelve of thirteen quarters covering APR-2 period.
  - Continued measures needed to eliminate subsidies and attract substantial investment: implement Action Plan, add domestic thermal generation capacity, and create an equalizing fund to set aside profits from favorable hydrology for periods of adverse hydrology.
- Financial sector:
  - 2003 progress: banking system wholly under private management; insurance sector reforms progressing; inauguration of a real-time gross settlements system.
  - Gaps in medium-term financial sector strategy (2004–07): lacks concrete measures and timetables for increasing financial intermediation, strengthening contract enforcement and creditor’s rights, increasing transparency in financial reporting, implementing a credit information system.
  - APR-2 does not discuss plans to channel government wages through banking system (expected to improve business practices, law and tax enforcement) or planned build-up of analytical capacity at the Bank of Albania for a move toward more formal inflation targeting.
  - Staffs expect progress following completion of an FSAP preliminarily scheduled for 2005.
- Statistics:
  - Quality and timeliness of statistics remain a major impediment to analysis and policy; APR-2 understates the emphasis needed on improving statistical production.
  - Inconsistencies noted between APR and other government documents; national accounts latest coverage only through 2001 while APR discusses growth through 2003.
  - Recommendation: produce national accounts for 2002 rapidly and outline timetable for improving regular production of national accounts in the next APR.

### Business climate and regulatory barriers
- Implementation of the administrative barriers action plan, with the assistance of FIAS, represents progress.
- Key outstanding issues:
  - Further work needed to reduce barriers in tax administration.
  - Unofficial monopolies are growing in power and stifling fair competition.
  - Improve accountability of public employees.
  - Build capacity of critical institutions such as tax and customs administration.

### Trade liberalization and external shocks
- Good progress was made in pursuing regional trade liberalization in 2003.
- The APR-2 appears to suggest a slowdown in the pace of further trade liberalization; this would run counter to the authorities' growth strategy and should be avoided.
- Authorities should rapidly assess the impact of the phasing out of the Multi Fibre Agreement at the beginning of 2005 on the growth of Albania’s textile exports.

### Environmental protection and natural resources management
- Environmental protection and sustainable natural resources management remains a priority.
- Steps taken:
  - Improve capacity of environmental institutions.
  - Improve communication of environmental information.
  - Commitment to reduce existing pollution and eliminate toxic substances close to inhabited areas, with work alongside international donors.
- Key issues and concerns:
  - Enhancing land tenure security is key for sustainable use of environmental resources and creating opportunities for the rural poor.
  - Notable progress in legal and regulatory framework, but significant concerns remain about the fragility of coastal area ecosystem.
  - Calls for a fundamental shift of current approaches towards sustainable development and land use planning.

### Targets, indicators, and monitoring (M&E)
- Progress in strengthening monitoring and evaluation is encouraging.
  - A total of sixteen ministries and agencies prepared monitoring and evaluation (M&E) matrices for the APR-2.
  - Introduction of a new format and standardization of matrices represents an improvement compared to the APR-1.
- Shortcomings and needs:
  - A number of the indicators appear unrealistic.
  - Need to more explicitly link the indicators and NSSED goals (including MDGs), and to include clear targets.
  - Ensure separate M&E systems are not developed; review and update M&E matrices to better align and harmonize indicators and targets with broader Albanian strategic goals, such as European Integration and NATO membership.
- Capacity constraints:
  - Lack of analysis capacity remains a constraint; agencies are gathering and presenting data but ability to analyze data for policy input is under-developed in many ministries.
  - Continue efforts to improve and strengthen systematic survey-based monitoring such as the LSMS to provide data to track policy outcomes over time.

### Participatory process and decentralization
- The participatory process was deepened during preparation of the progress report; institutionalization of participation continued.
  - The DoNSSED fully engaged in coordinating the participatory process for APR-2.
  - Under DoNSSED guidance and with international partners, more than 25 sectoral and regional consultations were organized with participation from local government, civil society, and parliament.
- Weaknesses:
  - The APR-2 is weak in describing the consultative process and the feedback from consultations, and the ongoing role of civil society in monitoring NSSED implementation.
  - Role of Parliament remains limited to participation of some key members in consultations; increased parliamentary involvement is critical for strengthening NSSED as a development instrument.
- Decentralization emphasis:
  - Emphasis on decentralization and participation is welcome but approach remains largely top down, emphasizing consultations over stakeholder empowerment.
  - NSSED consultative process could do more to build on and integrate local level development planning.

### Risks to the strategy
- Successful NSSED implementation at the currently foreseen rate depends on:
  - Government’s ability to improve investors’ confidence, curtail corruption, and strengthen institutional integrity, while weathering disturbances leading up to the mid-2005 elections.
- Fiscal and policy risks:
  - Lack of clear linkages between the NSSED, the MTBP and the annual budget presents risks to achieving poverty reduction outcomes.
  - Crucial to avoid overly optimistic budgetary projections which in the past have led to frequent ad-hoc expenditure cuts.
- Inherited liabilities:
  - Government faces inherited legacies with uncertain fiscal impacts (e.g., proposed restitution and compensation of former landowners and politically persecuted) that could have large fiscal consequences; APR-2 makes little mention of such potential liabilities.
- Sectoral and external risks:
  - Action plan on the electricity sector is on track, but hydrological variations remain a major macroeconomic risk; government should aggressively pursue mitigating measures and create without delay an equalizing fund.
- Donor alignment:
  - As development assistance available to Albania falls, donor programs need to be more closely aligned with the NSSED.
  - Despite substantial progress on coordination—particularly towards harmonizing the NSSED and the EU accession agendas—increasing alignment of donor priorities with the NSSED will be essential to maximize poverty alleviation outcomes.

### Conclusions and priority actions
- Overall assessment:
  - The second year’s performance in implementing the NSSED has been broadly satisfactory.
  - The APR-2 provides an acceptable basis for continued implementation of the NSSED.
  - Realization of measures foreseen for 2003 and the quality of APR-2 do not meet earlier expectations; future reports need to be more candid and analytical, assessing progress based on data and evidence and focusing on obstacles and constraints that impede poverty reduction.
- Priority areas for attention to be addressed in the next Annual Progress Report:
  - (i) Translating the priorities of the NSSED into concrete spending plans through the MTBP and the annual budgets.
  - (ii) Strengthening the evaluation and prioritization of investment projects to ensure efficient use of funds and debt sustainability.
  - (iii) Ensuring that spending plans are consistent and fit within an explicit medium-term fiscal and macroeconomic framework.
  - (iv) Improving the data for monitoring poverty outcomes and analytical capacity within the government.
  - (v) Further strengthening the participatory process, particularly the role of parliament in the formulation, implementation and oversight of the NSSED.

### IMF and World Bank staff view
- Staffs of the World Bank and the IMF consider the country’s efforts towards implementation of the strategy provide sufficient evidence for its continuing commitment to poverty reduction, and therefore the strategy continues to provide a credible framework for Bank and Fund concessional assistance.
- Staffs recommend that the respective Executive Directors of the IMF and the World Bank reach the same conclusion.

*Source: _cr04205 - 23. The government has made progress on improving aspects of the business climate*

### 1. On June 7, 2004, the government of Albania publicly presented its second Annual

### 1. On June 7, 2004, the government of Albania publicly presented its second Annual Progress Report (APR-2)

### Overview and overall assessment
- APR-2 analyzes the second year of implementation of the National Strategy for Socio-Economic Development (NSSED).
- JSA of PRSP and first APR identified shortcomings posing risks to successful implementation; APR-2 shows substantial improvements in some areas but weaknesses remain that limit effectiveness of the NSSED as a vehicle for sustained poverty reduction.
- Government actions noted:
  - Raised public awareness of NSSED through national, widely-publicized fora.
  - Better linked reforms across MDGs, SAA negotiations, and NSSED.
  - Strengthened monitoring and evaluation functions within key line ministries and defined indicators (see annex to APR-2).
  - Established and fully staffed Department of the NSSED (DoNESSED) within the Ministry of Finance to coordinate NSSED activities.
  - More active donor engagement and improved donor coordination.

### Updated poverty diagnostic
- Data sources used: Living Standard Measurement Survey (LSMS), 2001 census, IDA Poverty Assessment (2003).
- Key statistics and findings:
  - One quarter of the Albanian population—or close to 780,000 individuals—live in poverty, even after receipt of income transfers.
  - Less than 5 percent of the population are in extreme poverty (unable to meet basic food requirements).
  - About one-third of the population lacks access to two or more basic necessities such as basic education, water, sanitation, or heating.
- Analytical conclusions:
  - Diagnostic validates government focus on economic growth plus priority investments in education, healthcare, and infrastructure.
  - Patterns point to inadequate aggregate demand for labor—particularly skilled labor—indicating need for a broadly based program to foster poverty-reducing growth.
  - Income poverty is often compounded by non-income deprivations; quality and access problems in health and education require sectoral investments.
- Gaps and recommendations:
  - Data insufficient to reliably assess income distribution trends; further work and analysis encouraged.
  - Measures to address poverty among specific social groups (e.g., Roma, self-identified Egyptians, young families, youth at risk) need clearer priority actions and sectoral targeting.
  - Spatial targeting of regional poverty requires more discussion linking diagnostics to proposed priority actions.

### Implementation and updating of the strategy
- Coverage and shortcomings:
  - APR-2 provides adequate information about 2003 developments but lacks detailed analysis of:
    - Remaining weaknesses in NSSED implementation.
    - Links between shortfalls in budgetary revenues and realization of programmed investments.
    - Factors contributing to the large informal economy and high fiscal evasion.
  - Public priority actions listed for the year are not clearly linked to initial NSSED priority actions nor to criteria explaining their adjustment over time.

### Macroeconomic and fiscal framework
- 2003 macro performance (as presented):
  - Real GDP growth recovered to an estimated 6 percent in 2003.
  - Inflation was kept within the authorities’ target range.
  - Current account deficit was reduced.
  - Further steps towards fiscal consolidation occurred.
- Observations and cautions:
  - APR-2 associates recovery with increased private investment and improved business climate (partly attributed to FIAS-related reforms), but these attributions may be optimistic given lack of reliable recent data.
  - Improved hydrological conditions increased electricity production by 50 percent in 2003 relative to 2002; APR-2 does not sufficiently acknowledge this contribution.
  - Privatization of the largest commercial bank in 2004 highlighted as positive for financial deepening.
- Debt and fiscal risks:
  - Albania’s debt position appears sustainable over the medium-term but risks identified include: cost of domestic borrowing, large trade deficit, potential decline in remittances, and low level of Foreign Direct Investment.
  - A comprehensive sustainability assessment remains to be done.
- Budgeting, expenditure, and revenue issues:
  - APR-2 lacks an updated medium-term macroeconomic framework and weakly links NSSED to the Medium Term Budget Plan (MTBP) and annual budget cycle.
  - Annexes outline policies through 2007 but often do not present policy costs or integration into the MTBP.
  - Despite some revenue gains, 2003 revenue ratio is still lower than in 2000; fiscal revenue has not risen faster than nominal GDP in all recent years.
  - Expenditure cuts in 2003—equivalent to 2 percent of GDP—are not discussed regarding impacts on priority expenditure and investment.
  - APR-2 does not discuss use, in 2004, of half of the funds from privatization of the National Savings Banks for urgent priority investments in health, education and infrastructure.
  - APR-2 fails to mention indexation of government wages to inflation introduced in early-2004—a source of medium-term fiscal risk.
- Institutional recommendations:
  - Greater emphasis needed on public expenditure management and procurement reforms, possibly drawing on a recent ROSC.
  - DoNSSED progress in collaborating with the Budget Department is noted; authorities urged to accelerate efforts during preparation of the 2005 annual budget.
  - Improved mobilization of domestic resources should be emphasized in APR follow-up.
  - Need to evaluate and rank investment projects better, prioritizing those with identifiable concessional financing and subjecting projects to feasibility analysis and debt sustainability considerations.

### Structural and sectoral policies
- Crosscutting progress and remaining needs:
  - APR-2 gives better attention than APR-1 to governance, gender issues, and decentralization.
  - Spending priorities remain aligned with initial NSSED, with some improvement in intra-sectoral prioritization but continued need for cross-sectoral prioritization mechanisms.
- Governance and public administration:
  - Inclusion of measurable indicators of six key governance dimensions is positive though some targets are very ambitious.
  - APR-2 does not highlight establishment of the High Inspectorate (HI) as an anti-corruption tool and notes urgent need for adequate HI funding.
  - Public administration reform priorities for 2004–07 are appropriate but need more emphasis on public expenditure management and procurement.
  - Rapid decentralization requires civil service reforms at the local level.
  - Legal and judicial reforms suffer from a legislative logjam and need improved legislative drafting; execution/bailiff service improvements remain incomplete.
- Social protection and labor:
  - 2003 reforms: social insurance (contribution rates, harmonization of urban/rural schemes) and social assistance program reforms; improvements in targeting poorest observed.
  - New plans/draft laws aim to:
    - Link eligibility for cash social assistance benefits to availability for community work (to tighten income testing and promote financial independence).
    - Provide legal and financing framework for potential expansion of social services.
  - Implementation effectiveness and impact require careful monitoring.
  - Decision to protect vulnerable groups from electricity tariff increases; implementation not expected until mid 2004.
  - Labor market difficulties persist—particularly inadequate formal sector jobs—requiring broad economic and governance reforms; APR-2 places too much emphasis on job creation through active labor market programs.
- Pensions, education, health:
  - Pension reforms: incremental progress with measures to introduce clear rules for pension levels and changes in social insurance collection arrangements.
  - Education: numerous 2003 initiatives (administration efficiency, curriculum reform, improved enrolment) but implementation is nascent; more analysis needed and output/outcome indicators are missing. Adoption of a sector-wide strategy expected in the year should address gaps.
  - Health: public sector spending on health increased from 2.1 percent of GDP to 2.4 percent; targeted increases for operation and maintenance in primary health care. National HIV/AIDS Strategy and Health Promotion Strategy adopted; medium-term health sector reform strategy being finalized. APR-2 does not clearly outline priority sectoral reforms or measurable indicators and targets for implementation.

### Energy, financial sector, and statistics
- Electricity sector:
  - Recovery from 2000 crisis through multi-year Action Plan and Power Sector Policy Statement; performance targets met in twelve of thirteen quarters covering APR-2 period.
  - Continued measures needed to eliminate subsidies and attract substantial investment: implement Action Plan, add domestic thermal generation capacity, and create an equalizing fund to set aside profits from favorable hydrology for periods of adverse hydrology.
- Financial sector:
  - 2003 progress: banking system wholly under private management; insurance sector reforms progressing; inauguration of a real-time gross settlements system.
  - Gaps in medium-term financial sector strategy (2004–07): lacks concrete measures and timetables for increasing financial intermediation, strengthening contract enforcement and creditor’s rights, increasing transparency in financial reporting, implementing a credit information system.
  - APR-2 does not discuss plans to channel government wages through banking system (expected to improve business practices, law and tax enforcement) or planned build-up of analytical capacity at the Bank of Albania for a move toward more formal inflation targeting.
  - Staffs expect progress following completion of an FSAP preliminarily scheduled for 2005.
- Statistics:
  - Quality and timeliness of statistics remain a major impediment to analysis and policy; APR-2 understates the emphasis needed on improving statistical production.
  - Inconsistencies noted between APR and other government documents; national accounts latest coverage only through 2001 while APR discusses growth through 2003.
  - Recommendation: produce national accounts for 2002 rapidly and outline timetable for improving regular production of national accounts in the next APR.

_Italic: Independent staff analysis of Albania’s APR-2 as presented in the provided document._

### 23. The government has made progress on improving aspects of the business climate

### 23. The government has made progress on improving aspects of the business climate

### Business climate and regulatory barriers
- Implementation of the administrative barriers action plan, with the assistance of FIAS, represents progress.
- Key outstanding issues:
  - Further work needed to reduce barriers in tax administration.
  - Unofficial monopolies are growing in power and stifling fair competition.
  - Improve accountability of public employees.
  - Build capacity of critical institutions such as tax and customs administration.

### Trade liberalization and external shocks
- Good progress was made in pursuing regional trade liberalization in 2003.
- The APR-2 appears to suggest a slowdown in the pace of further trade liberalization; this would run counter to the authorities' growth strategy and should be avoided.
- Authorities should rapidly assess the impact of the phasing out of the Multi Fibre Agreement at the beginning of 2005 on the growth of Albania’s textile exports.

### Environmental protection and natural resources management
- Environmental protection and sustainable natural resources management remains a priority.
- Steps taken:
  - Improve capacity of environmental institutions.
  - Improve communication of environmental information.
  - Commitment to reduce existing pollution and eliminate toxic substances close to inhabited areas, with work alongside international donors.
- Key issues and concerns:
  - Enhancing land tenure security is key for sustainable use of environmental resources and creating opportunities for the rural poor.
  - Notable progress in legal and regulatory framework, but significant concerns remain about the fragility of coastal area ecosystem.
  - Calls for a fundamental shift of current approaches towards sustainable development and land use planning.

### Targets, indicators, and monitoring (M&E)
- Progress in strengthening monitoring and evaluation is encouraging.
  - A total of sixteen ministries and agencies prepared monitoring and evaluation (M&E) matrices for the APR-2.
  - Introduction of a new format and standardization of matrices represents an improvement compared to the APR-1.
- Shortcomings and needs:
  - A number of the indicators appear unrealistic.
  - Need to more explicitly link the indicators and NSSED goals (including MDGs), and to include clear targets.
  - Ensure separate M&E systems are not developed; review and update M&E matrices to better align and harmonize indicators and targets with broader Albanian strategic goals, such as European Integration and NATO membership.
- Capacity constraints:
  - Lack of analysis capacity remains a constraint; agencies are gathering and presenting data but ability to analyze data for policy input is under-developed in many ministries.
  - Continue efforts to improve and strengthen systematic survey-based monitoring such as the LSMS to provide data to track policy outcomes over time.

### Participatory process and decentralization
- The participatory process was deepened during preparation of the progress report; institutionalization of participation continued.
  - The DoNSSED fully engaged in coordinating the participatory process for APR-2.
  - Under DoNSSED guidance and with international partners, more than 25 sectoral and regional consultations were organized with participation from local government, civil society, and parliament.
- Weaknesses:
  - The APR-2 is weak in describing the consultative process and the feedback from consultations, and the ongoing role of civil society in monitoring NSSED implementation.
  - Role of Parliament remains limited to participation of some key members in consultations; increased parliamentary involvement is critical for strengthening NSSED as a development instrument.
- Decentralization emphasis:
  - Emphasis on decentralization and participation is welcome but approach remains largely top down, emphasizing consultations over stakeholder empowerment.
  - NSSED consultative process could do more to build on and integrate local level development planning.

### Risks to the strategy
- Successful NSSED implementation at the currently foreseen rate depends on:
  - Government’s ability to improve investors’ confidence, curtail corruption, and strengthen institutional integrity, while weathering disturbances leading up to the mid-2005 elections.
- Fiscal and policy risks:
  - Lack of clear linkages between the NSSED, the MTBP and the annual budget presents risks to achieving poverty reduction outcomes.
  - Crucial to avoid overly optimistic budgetary projections which in the past have led to frequent ad-hoc expenditure cuts.
- Inherited liabilities:
  - Government faces inherited legacies with uncertain fiscal impacts (e.g., proposed restitution and compensation of former landowners and politically persecuted) that could have large fiscal consequences; APR-2 makes little mention of such potential liabilities.
- Sectoral and external risks:
  - Action plan on the electricity sector is on track, but hydrological variations remain a major macroeconomic risk; government should aggressively pursue mitigating measures and create without delay an equalizing fund.
- Donor alignment:
  - As development assistance available to Albania falls, donor programs need to be more closely aligned with the NSSED.
  - Despite substantial progress on coordination—particularly towards harmonizing the NSSED and the EU accession agendas—increasing alignment of donor priorities with the NSSED will be essential to maximize poverty alleviation outcomes.

### Conclusions and priority actions
- Overall assessment:
  - The second year’s performance in implementing the NSSED has been broadly satisfactory.
  - The APR-2 provides an acceptable basis for continued implementation of the NSSED.
  - Realization of measures foreseen for 2003 and the quality of APR-2 do not meet earlier expectations; future reports need to be more candid and analytical, assessing progress based on data and evidence and focusing on obstacles and constraints that impede poverty reduction.
- Priority areas for attention to be addressed in the next Annual Progress Report:
  - (i) Translating the priorities of the NSSED into concrete spending plans through the MTBP and the annual budgets.
  - (ii) Strengthening the evaluation and prioritization of investment projects to ensure efficient use of funds and debt sustainability.
  - (iii) Ensuring that spending plans are consistent and fit within an explicit medium-term fiscal and macroeconomic framework.
  - (iv) Improving the data for monitoring poverty outcomes and analytical capacity within the government.
  - (v) Further strengthening the participatory process, particularly the role of parliament in the formulation, implementation and oversight of the NSSED.

### IMF and World Bank staff view
- Staffs of the World Bank and the IMF consider the country’s efforts towards implementation of the strategy provide sufficient evidence for its continuing commitment to poverty reduction, and therefore the strategy continues to provide a credible framework for Bank and Fund concessional assistance.
- Staffs recommend that the respective Executive Directors of the IMF and the World Bank reach the same conclusion.

*Source: _cr04205 - 23. The government has made progress on improving aspects of the business climate*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04205.pdf_