## _cr0589 - 2000. A safeguards assessment of the BoA was finalized in June 2002, and a fiscal ROSC in

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### Executive Summary
- Growth: 6 percent in 2003–04 with low inflation and an appreciating lek reflecting increasing confidence.
- Public debt-to-GDP: fell from nearly 67 percent at end-2001 to about 55 percent at end-2004.
- External liabilities: limited at 17 percent of GDP.
- Trade and current account:
  - Goods and services trade deficit: 23 percent of GDP in 2004.
  - Current account deficit: narrowed from 10 to 7 percent of GDP in 2002–04.
- Program performance: since the fourth review has been good; program conditionality observed, some with significant margins.
- Key priorities: improving competitiveness, attracting investment, infrastructure, governance, property rights protection, and the rule of law.
- Bank of Albania (BoA) management commitment: BoA independence, price and financial stability, and a flexible exchange rate.
- Monetary stance: remains tight; current neutral bias appropriate.
- Financial sector: dynamism after large Savings Bank privatization; BoA increasing prudential vigilance; upcoming FSAP expected to contribute.
- Dollarization: hinders monetary transmission but not an immediate financial stability threat.
- 2005 budget: envisages current spending restraint leading to a current surplus and increased public investment; authorities agreed to refrain from across-the-board wage increases in 2005 and to formally eliminate inflation indexation of wages before the 2006 budget.
- Poverty: absolute poverty indicators improved; one fourth of population still below the poverty line.

### Macroeconomic outlook and performance
- Recent macro performance:
  - After a slowdown in 2002, recovery to about 6 percent growth.
  - 12-month inflation generally within the 2–4 percent target of the Bank of Albania.
  - Lek appreciation reflects increased confidence.
- Growth contributors, 2003–04 (in percent):
  - Agriculture, Hunting and Forestry: 0.8 1.0
  - Industry: 0.3 0.3
  - Construction: 0.9 0.5
  - Trade and services: 3.2 3.2
  - Transport: 0.9 0.9
  - GDP at factor cost: 6.0 5.9
- Historical performance:
  - Since 1998, output has increased at an average annual rate over 6½ percent and per capita income has doubled.
- Risks:
  - TFP growth may be waning; nontradeable sectors contributed most growth; industry contribution modest.
  - Financing of trade deficit largely by migrant remittances and transfers, which may decline as a share of GDP over time.

### External position and current account (2004)
- External position strengthened further in 2004, exceeding programmed levels, reflecting trade gains and the accounting effect of the lek appreciation.
- Factors contributing to improvement:
  - Strong migrant remittances and tourism earnings.
  - Growth in re-export processing activities.
  - Subdued imports due to increased domestic supply of strategic products (electricity, foodstuffs).
- Current account deficit:
  - 7 percent of GDP in 2004 — compared to 8 percent of GDP envisaged in program and to 8¼ percent of GDP in 2003.
- Exchange rate and competitiveness:
  - Lek appreciated about 6 percent with respect to the euro during 2004 despite easing domestic interest rates and occasional BoA interventions.
  - While Albania’s cost advantage remains wide, competitiveness may be starting to erode.

### National accounts revisions (Box 1) — key figures preserved
- INSTAT published 2001–02 national accounts incorporated in this paper, resulting in a 7 percent lower nominal GDP level.
- Tabulated nominal GDP (lek billion) — current estimate (2000–2006): 531 589 630 695 780 857 939
- Previous estimate 1/ (2000–2006): 531 610 678 746 837 920 1007
- Difference (in percent): 0 -3.6 -7.0 -6.9 -6.8 -6.8 -6.8
- Real GDP growth (in percent) — current estimate (2000–2006): 7.3 7.2 3.4 6.0 5.9 6.0 6.0
- Previous estimate 1/ (2000–2006): 7.3 7.6 4.7 6.0 6.2 6.0 6.0
- Difference (in percent): 0.0 -0.4 -1.3 0.0 -0.3 0.0 0.0

### Monetary and financial sector policies
- Monetary framework and stance:
  - BoA independence, focus on price and financial stability, flexible exchange rate.
  - BoA policy rate eased since 2002 by 325 basis points to 5¼ percent.
  - 12-month rate of inflation closed 2004 at 2.2 percent.
- Reserves and liquidity:
  - Reserve import cover about 4 months.
  - BoA net domestic assets and international reserves overperformed.
- Financial sector developments:
  - Large Savings Bank privatization (more than half of banking sector deposits) revitalized banking activity.
  - Financial intermediation expanding; credit to private sector low at 8½ percent of GDP in 2004 but growing at 30 percent annually.
  - BoA introduced a real-time gross settlement system; plans in 2005 to launch a bulk clearing system for small transactions.
  - Banks expected to continue substituting domestic for foreign assets and to increase lek-denominated lending.
- Dollarization and banking soundness:
  - Dollarization increased after pyramid schemes collapse but declined; lending to private sector still mostly in foreign currency.
  - Limits on banks’ open foreign currency positions, strict lending criteria, and large asset positions abroad mitigate risks.
- Banking sector indicators (2002–2004 1/ as at September 2004):
  - Outstanding Bank Loans by Economic Sector (percent of total):
    - Trading and maintenance of durables: 40.4 34.0 21.9
    - Processing industry: 17.0 17.0 18.2
    - Real estate: 9.1 13.0 15.6
    - Construction: 8.6 10.0 10.2
    - Hotels and restaurants: 6.0 6.0 8.3
    - Agriculture, hunting and fruit production: 0.8 1.0 1.6
    - Other: 18.1 19.0 24.2
  - Indicators of Banking Sector Soundness:
    - Regulatory capital as a percent of risk weighted assets: 31.6 28.5 25.1
    - Non performing loans as a percent of total loans: 5.6 4.6 4.7
    - Non performing loans net of provisions as a percent of capital: 4.8 3.9 3.4
    - Non performing loans as a percent of total assets: 0.3 0.2 0.2
    - Return on assets (annual): 1.2 1.2 1.4
    - Return on equity (annual): 19.1 19.5 23.7
    - Liquid assets to total assets (liquid asset ratio): 77.8 73.6 73.5

### Fiscal policy and 2004–05 budget outcomes
- 2004 budget outturn (In percent of GDP) — reported values:
  - Total Revenue and Grants: Budget 25.4 / Program 24.8 / Estimate 23.7
  - Tax Revenue: 21.9 / 21.6 / 21.3
  - Non-tax Revenue: 2.7 / 2.3 / 2.0
  - Grants: 0.8 / 0.8 / 0.4
  - Total Expenditure: 31.7 / 30.9 / 28.5
  - Current Expenditure: 24.0 / 23.8 / 23.4
  - Capital Expenditure: 7.1 / 6.6 / 5.2
  - Overall Balance: -6.3 / -6.2 / -4.9
  - Domestic Financing: 4.5 / 4.5 / 4.1 (of which Domestic Borrowing: 2.0 / 2.0 / 2.0)
  - Foreign Financing: 1.8 / 1.7 / 0.8
  - Current Balance: 0.5 / 0.1 / -0.1
  - Public debt: 61.5 / 58.6 / 55.3
- Fiscal performance drivers:
  - Tax collections met program projections; foreign project-related disbursements and grants underperformed.
  - Fiscal spending contained to meet domestic borrowing targets, yielding an overall deficit lower than programmed by 1¼ percentage point of GDP.
  - Use of half of Savings Bank privatization proceeds to retire treasury bills reduced domestic borrowing by 0.7 percentage point of GDP.
- 2005 budget:
  - Envisages fiscal and public debt retrenchment; premised on realistic revenue projection.
  - Authorities agreed to refrain from across-the-board wage increases in 2005 and to eliminate inflation indexation of wages before the 2006 budget.

### Structural reforms, privatization, and governance
- 2004 reform momentum:
  - Privatization: Savings Bank, INSIG, Albtelecom, ARMO.
  - Electricity sector Power Sector Action Plan (PSAP): facilitating elimination of electricity import subsidies in 2005 budget.
  - Customs modernization and ASYCUDA deployment: average custom clearing time reduced from more than five days in 2003 to below two days.
- Governance and institutional challenges:
  - Remaining challenges: tax administration, taxpayer harassment, poor professionalism of some public servants, weak investment climate.
  - Slow progress: rule of law, court system, organized crime, human trafficking, money laundering, corruption.
- Anti-money laundering and asset declaration:
  - Implementation of asset disclosure requirements for public officials; passage of property restitution law; active anti-money laundering collaboration.

### External sustainability, medium-term prospects, and risks
- Authorities envisage 6 percent growth in 2005 underlying the budget.
- Staff view: several arguments support the 6 percent 2005 scenario but with downward risk.
- Medium-term projection:
  - Growth can remain close to historical 6 percent trend under improved investment climate.
  - External deficit projected to resume downward trend, possibly remaining around 5–5½ percent of GDP in the medium term owing to capital inflows and associated imports.
- Debt sustainability:
  - DSAs show limited vulnerability given low external liabilities but underline that curtailing the trade deficit and sustaining high growth are essential.
  - If investment and exports disappoint, output growth could be significantly lower; adjustment would need to fall on domestic absorption.

### 2005 Fiscal Package (Box 3) — measures and costs
- Fiscal cost: about 0.3 percent of GDP in 2005.
- VAT refund clearing plan: clear VAT refund arrears to exporters (0.1 percent of GDP) and implement quick refund system in 2005.
- Measures to reduce administrative complexity and tax evasion:
  - Subjecting the first sale of residential units to VAT, exempting rental payments starting in 2006.
  - Eliminating annual renewal for small business registration.
  - Reducing personal income tax brackets to 5 from 7.
  - Including social security contributions in personal income tax base.
  - Introducing personal income tax returns.
- Measures to bring business tax obligations closer to regional average:
  - Reduce corporate income tax rate from 25 percent to 23 percent in 2005, and to 20 percent in 2006.
  - Reduce small business tax rate on turnover from 4 percent to 3 percent.
  - Exempt from VAT sub-contractors of re-export companies.
  - Shorten carry-forward period before reimbursement of VAT credit from 6 to 3 months.
- Measures to strengthen taxpayers’ rights:
  - Strengthen appeal procedures with clear escalation steps and time limits.
  - Limit response period for VAT refund requests (before interest charges apply) to 30 days.
  - Introduce accrual of interest on overdue tax refunds.
- Medium-term fiscal path (In percent of GDP) — selected lines:
  - Overall balance: -4.9 -4.9 -4.2 -3.9 -3.6 -3.3
  - Domestic financing: 4.1 3.3 3.0 2.7 2.7 2.7
    - Privatization receipts: 2.0 0.6 0.4 0.2 0.2 0.2
    - Domestic net borrowing: 2.0 2.7 2.6 2.5 2.5 2.5
  - Foreign financing: 0.8 1.6 1.1 1.1 0.9 0.6
  - Public debt: 55.3 54.5 54.0 54.0 53.1 52.0
    - Domestic: 38.0 37.3 36.7 36.5 35.9 35.3
    - External: 17.3 17.1 17.2 17.5 17.3 16.8

### Program implementation, monitoring, and conditionality
- Since the fourth review, all program conditionality observed; end-September 2004 quantitative and structural performance criteria and end-2004 structural performance criterion met, some with significant margins.
- Performance criteria met (Fifth Review) — selected items:
  - Salaries of 3,500 Government employees and all employees of BoA to be paid through banking system — Test-date: End-September 2004 — Status: Met.
  - Salaries of at least 10,000 employees of budgetary institutions to be paid through banking system — Test-date: End-December 2004 — Status: Met.
- Structural benchmarks and ongoing requirements include:
  - ASYCUDA extension and risk assessment modules in 5 customs houses.
  - Improve VAT refunds reporting and implement quick refund system.
  - Repeal price indexation of wages formally.
  - Independent feasibility studies for large nonconcessional projects.
  - Nonaccumulation of new external payments arrears.

### Safeguards, project-financing, and monitoring
- Safeguards and monitoring for nonconcessional foreign project loans — status:
  - (i) Conduct independent feasibility study for any large project financed through non-concessional borrowing. — Met.
  - (ii) Provide quarterly listing and status report on all projects considered for nonconcessional foreign financing. — Met.
- Definition: large projects financed by nonconcessional foreign borrowing defined as those involving total nonconcessional foreign borrowing in excess of US$25 million.
- Adjusters and definitions for program monitoring:
  - NDA level as of end-December 2003: Lek 72 billion.
  - Privatization proceeds assumptions (foreign currency) cumulative from January 1, 2004 to End-March 2005: Lek 15.9 billion (US$138.5 million) and to End-June 2005: Lek 16.0 billion (US$138.5 million).
  - Exchange rate for NCG adjuster: Lek 106.5 per U.S. dollar.

### External financing, debt, and vulnerability — selected indicators
- Total external debt stock (percent of GDP) — sample from memorandum: 27.8 25.1 21.7 ... 18.0
- Gross international reserves (millions of U.S. dollars): 608 737 860 1,026 1,131 1,374 1,227 1,459 1,624 1,830 2,069 2,211 (selected series across tables).
- Balance of goods and services (percent of GDP): -23.2 -25.8 -24.8 ... -23.1 -22.9 -23.0 -22.2 -20.8 -19.9 -19.5 -19.3
- Current account (percent of GDP): -6.4 -9.7 -8.2 ... -8.1 -7.0 -7.9 -7.0 -6.6 -6.0 -5.6 -5.6

### Fund relations, Fund financing, and safeguards
- PRGF arrangement:
  - Original three-year PRGF arrangement approved on June 21, 2002 for a total of SDR 28.00.
  - Schedule of disbursements under PRGF arrangement (SDR 4.0 tranches): June 2002; January 2003; July 2003; January 2004; July 2004; March 2005; October 2005 (assumes extension); Total: 28.0 (57.4 percent of quota).
- Projected payments to the Fund (in millions of SDRs) — selected:
  - PRGF Repayments (principal) by year: 6.2 6.8 6.4 6.2 7.6 9.4 9.6 9.1
  - Outstanding Fund credit (end-of-year values): 59.6 60.8 62.4 64.3 56.7 47.3 37.6 28.5
- Safeguards assessment:
  - A full safeguards assessment of the Bank of Albania with respect to the PRGF arrangement was finalized in June 2002.
  - Findings: BoA made significant progress; minor weaknesses in internal auditing, financial reporting, and internal control systems to be addressed.

### Social sectors, statistics, and public expenditure management
- Social sector challenges: weak physical infrastructure; demographic shifts; internal and regional instability; limited governance capacity; poor resource management; weak technical capabilities.
- Government priorities: increase budgetary allocations to health and education under MTBP; improve access and quality of education and health; improve targeting efficiency of social protection.
- Statistical improvements and TA:
  - New statistical law enacted; preliminary 2003 national accounts to be published; experimental quarterly GDP estimates planned.
  - STA project financed by the Italian government: $500,000 committed over November 2003–November 2005 to improve national accounts and source data.
- Public expenditure management reforms:
  - Strengthen MTBP linkages with NSSED; prepare action plan for strengthening budget systems, procedures, and monitoring of budget outputs; train budget staff in line ministries.

### Outlook, policy guidance, and key policy recommendations
- Near-term outlook:
  - Growth: continuation at about its 6 percent trend in 2005.
  - Near-term demand drivers: public investment and rising credit to private sector including consumer credit.
  - Downside risks: political uncertainties; less stimulative external environment; real effective appreciation of the lek that "may have eroded competitiveness in some sectors."
- Monetary policy guidance:
  - Maintain flexible exchange rate; interventions to smooth fluctuations and maintain reserve cover without any exchange rate target.
  - Repo rate remains main policy instrument; room for further easing in 2005 if trends continue but pause warranted given seasonal and external oil price considerations.
- Fiscal policy recommendations:
  - Reduce domestic borrowing requirement and domestic debt to ensure sustainability given low external debt (17¼ percent of GDP).
  - Channel increasing resources to investment in priority areas and improve quality of fiscal institutions, including governance and implementation capacity.
  - Implement tax administration reforms: standardized procedures, risk assessment audits, training, use of information technology, and fair taxpayer relations.
  - Continue privatization, sectoral restructuring, and removing barriers to investment to promote private sector development.
- Structural and governance reforms:
  - Accelerate reforms to improve infrastructure, investment climate, property rights protection, rule of law, and public sector governance.
  - Implement independent feasibility studies for large nonconcessional projects and ensure open tendering except in exceptional circumstances.
- Program continuity:
  - Staff supports completion of the 2004 Article IV consultation, fifth review of the program, and financing assurances review.
  - Authorities requested completion of the program and financing assurances reviews and a five-month extension of the program to November 2005 to allow the sixth review and associated disbursement within the program period.

*Source: IMF staff and Albanian authorities as presented in the document.*

### 2000. A safeguards assessment of the BoA was finalized in June 2002, and a fiscal ROSC in

### _cr0589 - 2000. A safeguards assessment of the BoA was finalized in June 2002, and a fiscal ROSC in

### Executive Summary
- Growth has been 6 percent in 2003–04 with low inflation and an appreciating lek reflecting increasing confidence.
- Public debt-to-GDP ratio fell from nearly 67 percent at end-2001 to about 55 percent at end-2004.
- External liabilities are limited at 17 percent of GDP.
- Trade deficit remains wide; economy dependent on transfers from abroad.
- Program performance since the fourth review has been good; program conditionality was observed, some with significant margins.
- Political environment dominated by upcoming mid-2005 elections.
- Outlook: near-term growth close to 6 percent trend supported by domestic demand; medium-term growth increasingly by productivity and external trade gains.
- Key priorities: improving competitiveness, attracting investment, infrastructure, governance, property rights protection, and the rule of law.
- BoA management commitment: BoA independence, price and financial stability, and a flexible exchange rate.
- Monetary stance: remains tight; current neutral bias appropriate.
- Financial sector: dynamism after large Savings Bank privatization; BoA increasing prudential vigilance; upcoming FSAP expected to contribute.
- Dollarization: hinders monetary transmission but not an immediate financial stability threat.
- 2005 budget: supported by staff; envisages current spending restraint leading to a current surplus and increased public investment; authorities agreed to refrain from across-the-board wage increases in 2005 and to formally eliminate inflation indexation of wages before the 2006 budget.
- Structural reforms with momentum: privatization, electricity sector restructuring, national accounts statistics; need further progress in infrastructure, economic statistics, and investment climate.
- Poverty: absolute poverty indicators improved; one fourth of population still below the poverty line.

### Macroeconomic Outlook and Performance
- Recent macro performance: after a slowdown in 2002, recovery to about 6 percent growth; 12-month inflation generally within the 2–4 percent target of the Bank of Albania.
- Lek appreciation reflects increased confidence.
- External current account and trade deficits improved but remain high: goods and services trade deficit was 23 percent of GDP in 2004.
- Current account deficit narrowed from 10 to 7 percent of GDP in 2002–04.
- Private sector accounts for about ¾ of GDP.
- Public indebtedness declined by 9½ percentage points of GDP since end-2002 to 55¼ percent of GDP at end-2004.
- Since 1998, output has increased at an average annual rate over 6½ percent and per capita income has doubled (Figure 1 references).
- Contribution to growth, 2003–04 (in percent): Agriculture, Hunting and Forestry 0.8 1.0; Industry 0.3 0.3; Construction 0.9 0.5; Trade and services 3.2 3.2; Transport 0.9 0.9; GDP at factor cost 6.0 5.9.
- Risks: TFP growth may be waning; nontradeable sectors contributed most growth; industry contribution modest.
- Financing of trade deficit largely by migrant remittances and transfers, which may decline as a share of GDP over time.

### Monetary and Financial Sector Policies
- Monetary policy framework: BoA independence, focus on price and financial stability, flexible exchange rate.
- Monetary stance: tight with a current neutral bias.
- BoA performance: net domestic assets and international reserves overperformed; reserve import cover about 4 months (Table 7).
- Financial sector developments:
  - Large Savings Bank privatization (more than half of banking sector deposits) revitalized banking activity.
  - Financial intermediation expanding; authorities promoting market infrastructure and curtailing cash use (including paying public wages through banking system).
  - Prudential vigilance stepped up by BoA; upcoming FSAP to assist.
- Dollarization: identified as hindering monetary policy transmission mechanism but not an immediate financial stability threat.
- Customs modernization and ASYCUDA deployment improved efficiency and revenue; average custom clearing time reduced from more than five days in 2003 to below two days.

### Fiscal Policy and 2004–05 Budget Outcomes
- 2004 budget outturn (In percent of GDP):
  - Budget/Program/Estimate: Total Revenue and Grants 25.4 24.8 23.7; Tax Revenue 21.9 21.6 21.3; Non-tax Revenue 2.7 2.3 2.0; Grants 0.8 0.8 0.4.
  - Total Expenditure 31.7 30.9 28.5; Current Expenditure 24.0 23.8 23.4; Capital Expenditure 7.1 6.6 5.2.
  - Overall Balance -6.3 -6.2 -4.9.
  - Domestic Financing 4.5 4.5 4.1 of which: Domestic Borrowing 2.0 2.0 2.0.
  - Foreign Financing 1.8 1.7 0.8.
  - Current Balance 0.5 0.1 -0.1.
  - Public debt 61.5 58.6 55.3.
- Fiscal performance: tax collections met program projections; foreign project-related disbursements and grants underperformed; fiscal spending contained to meet domestic borrowing targets, yielding an overall deficit lower than programmed by 1¼ percentage point of GDP.
- 2005 budget: staff supported; embodies fiscal and public debt retrenchment; premised on realistic revenue projection aiding planning and implementation.
- Policy discussions included improving tax compliance, taxpayer rights, budget process, expenditure management, and civil service reform.
- Authorities agreed to refrain from across-the-board wage increases in 2005 and to eliminate inflation indexation of wages before the 2006 budget.

### Structural Reforms, Privatization, and Governance
- 2004 reforms gaining momentum: privatization (Savings Bank, INSIG, Albtelecom, ARMO), electricity sector Power Sector Action Plan (PSAP) facilitating elimination of electricity import subsidies in 2005 budget, customs modernization, and budget process improvements.
- ASYCUDA deployment met a program performance criterion.
- Customs outcomes: clearing time reduced below two days; seizures and prosecution cases increased more than fivefold.
- Remaining challenges: tax administration, taxpayer harassment, poor professionalism of some public servants, weak investment climate.
- Wider institutional reforms (rule of law, court system, organized crime, human trafficking, money laundering, corruption) progressing slowly; EU Stabilisation and Association negotiations not concluded.
- 2004 steps: implementation of asset disclosure requirements for public officials; passage of property restitution law; active anti-money laundering collaboration.
- Poverty: reductions in absolute poverty noted but targeted social programs need strengthening.

### Program Implementation and Reviews
- Since the fourth review, all program conditionality observed; end-September 2004 quantitative and structural performance criteria and end-2004 structural performance criterion met, some with significant margins (Table 4 referenced).
- Staff supports completion of the 2004 Article IV consultation, fifth review of the program, and financing assurances review.
- Accompanying supplementary Memorandum of Economic and Financial Policies constitutes a strong policy program.
- Authorities requested completion of the program and financing assurances reviews; and a five-month extension of the program to November 2005 to allow the sixth review and associated disbursement to take place within the program period (from the attached Letter of Intent and Supplementary MEFP).

*Source: IMF staff and Albanian authorities as presented in the document.*

### 9.      In 2004, the external position

### _cr0589 - 9.      In 2004, the external position

### External position and current account (2004)
- External position strengthened further in 2004, exceeding programmed levels, reflecting trade gains and the accounting effect of the lek appreciation.
- Indications contributing to improvement:
  - Strong migrant remittances and tourism earnings.
  - Growth in re-export processing activities.
  - Subdued imports due to increased domestic supply of strategic products (electricity, foodstuffs).
- Current account deficit (decline to):
  - 7 percent of GDP in 2004 — compared to 8 percent of GDP envisaged in program and to 8¼ percent of GDP in 2003.
- Exchange rate and competitiveness:
  - Lek appreciated about 6 percent with respect to the euro during 2004 despite easing domestic interest rates and occasional BoA interventions.
  - While Albania’s cost advantage remains wide, competitiveness may be starting to erode.

### National accounts revisions (Box 1)
- INSTAT published 2001–02 national accounts incorporated in this paper, resulting in a 7 percent lower nominal GDP level (Box 1).
- Revisions and implications:
  - Real GDP growth in 2002 corrected downwards reflecting a sharper drop in electricity output and lower growth in industry and services.
  - Both 2001 and 2002 GDP deflators are now lower.
  - As a result, 2002 nominal GDP is now 7 percent lower than in previous staff reports — a difference carried forward.
  - Figures for periods after 2002 are preliminary estimates or projections agreed with the authorities, but have no national accounts support.
  - To facilitate comparisons, all GDP-share figures (including the program) are presented as ratios to the new GDP in this report.
- Tabulated nominal GDP (lek billion) and differences (as presented):
  - Current estimate (2000–2006): 531 589 630 695 780 857 939
  - Previous estimate 1/ (2000–2006): 531 610 678 746 837 920 1007
  - Difference (in percent): 0 -3.6 -7.0 -6.9 -6.8 -6.8 -6.8
- Real GDP growth (in percent) current and previous estimates:
  - Current estimate (2000–2006): 7.3 7.2 3.4 6.0 5.9 6.0 6.0
  - Previous estimate 1/ (2000–2006): 7.3 7.6 4.7 6.0 6.2 6.0 6.0
  - Difference (in percent): 0.0 -0.4 -1.3 0.0 -0.3 0.0 0.0
- Sources: INSTAT for 2000-02; staff estimates and projections thereafter.
- 1/ IMF Country Report No. 04/206.

### Macroeconomic outlook (growth, external deficit, risks)
- Authorities envisaged 6 percent growth in 2005, which underlies budget projections, or possibly even somewhat higher.
- Staff view:
  - Several arguments support the 6 percent 2005 scenario, but with some downward risk.
  - Domestic demand robust; activity accelerating, buttressed since the summer by increased public investment and planned privatizations expected to attract FDI and support investors’ confidence.
  - Banking intermediation and domestic lending growing; several banks tapping consumer credit market.
- External current account outlook:
  - Projected to remain broadly unchanged as a share of GDP as export growth is offset by the negative impact of oil price increases and a deceleration of external transfers.
- Medium-term projection:
  - Under assumption of an improved investment climate, growth can remain close to historical 6 percent trend.
  - External deficit projected to resume a downward trend, although possibly remaining around 5–5½ percent of GDP in the medium term owing to capital inflows and associated imports.
- Main risks:
  - Floundering on structural and institutional reforms.
  - Debt sustainability analyses (DSAs) show limited vulnerability given low external liabilities but underline that curtailing the trade deficit and sustaining high growth are essential.
  - If investment and exports disappoint, output growth could be significantly lower; adjustment would need to fall on domestic absorption.

### Monetary and financial sector policies
- Monetary stance and inflation:
  - Despite interest rate cuts, monetary policy stance remained tight and inflation subdued.
  - BoA policy rate eased since 2002 by 325 basis points to 5¼ percent, yet remained high and, together with lek appreciation, resulted in tight monetary conditions.
  - 12-month rate of inflation closed 2004 at 2.2 percent.
- Money and deposits:
  - Composition of broad money shifting away from cash towards bank deposits, with bulk of growth contributed by lek deposits.
  - Annual deposit growth and shifts documented in figures (seasonal and component charts referenced in source).
- Dollarization and banking:
  - Following pyramid schemes collapse, dollarization increased but even at its peak in late 2002 remained below the average for transition countries.
  - Dollarization of deposits declined in response to tighter monetary policy; lending to private sector still mostly in foreign currency.
  - Potential risks mitigated by limits on banks’ open foreign currency positions, strict lending criteria, and large asset positions abroad.
  - Banks expected to continue substituting domestic for foreign assets and to increase lek-denominated lending.
- BoA governance and operations:
  - Newly appointed BoA management reaffirmed commitment to price stability, flexible exchange rate regime, and central bank independence.
  - Treasury’s overdraft facility with BoA (seldom used, and always for liquidity management and not for budget financing) is to be phased out, starting 2005.
  - Government securities issued to BoA to cover reserve valuation losses stemming from lek appreciation in accordance with the Central Bank Law (MEFP ¶18).
  - Staff supported BoA plans to reinforce analytical and forecasting capabilities and recommended that Board meetings be followed by public statements explaining the Board’s policy stance.
- Exchange rate intervention policy:
  - Interventions should aim at smoothing fluctuations, maintaining reserve cover, and facilitating shift towards lek assets—without any exchange rate target.
  - Authorities view appreciation as temporary loss of competitiveness but prefer monetary policy focus on inflation target.
  - Lek appreciation with respect to the US dollar largely explained by evolution of the euro, which the lek broadly tracked during second half of 2004.
- Policy stance near end-2004:
  - With inflation subdued and lek appreciating, BoA’s gradual easing was appropriate but a pause was warranted given seasonal and external oil price considerations.
- Financial sector reforms and infrastructure:
  - Reforms to foster financial intermediation, curtail cash use, and strengthen prudential supervision.
  - Credit to private sector low at 8½ percent of GDP in 2004, but growing at 30 percent annually.
  - BoA introduced a real-time gross settlement system and plans in 2005 to launch a bulk clearing system for small transactions.
  - Government channeling payment of salaries through banks to improve governance and household access to financial services (MEFP ¶16).
  - Authorities considering development of an inter-bank collateralized money market and foreign exchange swaps.
  - Staff suggested measures to deepen the T-bill market, including extending participation to large enterprises and introducing market-making arrangements.
  - With MFD and WB assistance, authorities upgrading prudential monitoring capacity; 2005 FSAP seen as opportunity to assess financial stability issues and chart improvements.

- Banking sector indicators (as presented, 2002–2004 1/):
  - Outstanding Bank Loans by Economic Sector in percent of total (2002 2003 2004 1/):
    - Trading and maintenance of durables: 40.4 34.0 21.9
    - Processing industry: 17.0 17.0 18.2
    - Real estate: 9.1 13.0 15.6
    - Construction: 8.6 10.0 10.2
    - Hotels and restaurants: 6.0 6.0 8.3
    - Agriculture, hunting and fruit production: 0.8 1.0 1.6
    - Other: 18.1 19.0 24.2
  - Indicators of Banking Sector Soundness (2002 2003 2004 1/):
    - Regulatory capital as a percent of risk weighted assets: 31.6 28.5 25.1
    - Non performing loans as a percent of total loans: 5.6 4.6 4.7
    - Non performing loans net of provisions as a percent of capital: 4.8 3.9 3.4
    - Non performing loans as a percent of total assets: 0.3 0.2 0.2
    - Return on assets (on an annual basis): 1.2 1.2 1.4
    - Return on equity (on an annual basis): 19.1 19.5 23.7
    - Liquid assets to total assets (liquid asset ratio): 77.8 73.6 73.5
  - Source: Data provided by Bank of Albania.
  - 1/ As at September 2004.

### Fiscal policy, budget performance, and reforms
- Fiscal consolidation and public finance stance:
  - Public finances strengthened substantially over past few years, but budget process and administration lagged.
  - Overall deficit improved by about 3 percentage points of GDP in 2002-2004, reflecting expenditure retrenchment.
  - Tax and customs administrations’ capacity remains low despite some increases in tax collections.
  - Repeated over-optimistic budget revenue projections undermined progress in budget implementation.
- 2004 developments:
  - Authorities maintained fiscal consolidation; after downward adjustments during fourth review, budget implementation improved.
  - Through a supplementary budget, Savings Bank privatization proceeds were allocated to investment and debt reduction in equal parts.
  - Combined with limited deficit, lek appreciation, and GDP growth, resulted in a decline of 5½ percentage points in the debt-to-GDP ratio.
  - In 2004, the current budget estimated to have been in broad balance, the first time since transition.
  - Budget financing—including borrowing and privatization receipts—funded only investment.
- 2005 budget stance and targets:
  - 2005 budget envisages 6 percent growth (authorities), reduction in underlying domestic borrowing by 0.2 percentage points of GDP to 2.7 percent of GDP.
  - Aims to accommodate expected expansion of private sector credit without triggering inflation and to keep public debt-to-GDP ratio on downward trend.
  - Plans to increase total spending somewhat as share of GDP while reducing current outlays and redirecting resources to investment in priority areas.
  - Expenditure plans based on a credible revenue forecast reflective of past realizations.
  - Divestment of remaining minority stakes in banking and other companies envisaged; Albtelecom privatization not budgeted due to timing and amount uncertainties.
  - Authorities committed to devote half of proceeds of all large privatizations to debt redemption.
- 2005 fiscal package and administrative reforms:
  - Substantial additional efforts needed to modernize and enhance efficiency of revenue administration (MEFP ¶12).
  - Authorities plan to expand ASYCUDA to remaining custom houses and apply risk assessment methods for inspections.
  - Staff recommended tax administration reforms emphasizing standardized procedures, risk assessment methods, strict application of existing regulations (reforming if necessary), training and professional qualification of tax officials, fair and professional taxpayer relations, and extensive use of information technology.
  - Staff supported thrust of 2005 fiscal package and implementation of many FAD TA recommendations (Box 3), but argued against some measures:
    - Concerned that introduction of a VAT exemption of providers to exporters and filing requirements beyond monitoring capabilities of tax administration risk adding opportunities for noncompliance.
  - Authorities agreed to discuss these issues with upcoming FAD TA and to supplement enacted package as necessary.

- Budget performance table excerpts (In percent of GDP) — reported values:
  - Total Revenue and Grants: 25.7 24.4 26.0 24.0 25.4 23.7 24.1
  - of which: Tax Revenue: 22.0 20.5 22.1 20.9 21.9 21.3 21.3
  - Total Expenditure: 34.6 31.1 32.1 28.5 31.7 28.5 29.0
  - of which: Current Expenditure: 26.3 24.5 24.2 24.1 24.0 23.4 22.7
  - Overall Balance: -8.8 -6.6 -6.1 -4.4 -6.3 -4.9 -4.9
  - Domestic Financing: 4.3 3.3 3.0 3.0 4.5 4.1 3.3
  - of which: Domestic Borrowing: 2.5 3.2 2.9 2.9 2.0 2.0 2.7
  - Foreign Financing: 4.5 3.3 3.1 1.4 1.8 0.8 1.6
  - Current Balance: -1.2 -0.7 1.1 -0.5 0.5 -0.1 0.5
  - Public debt: 69.5 64.8 67.1 60.7 61.5 55.3 54.5
  - Sources: Ministry of Finance; and staff estimates.
  - 1/ Incorporates the Supplementary Budget.

- Policy priorities and recommendations (fiscal):
  - Reduce domestic borrowing requirement and domestic debt to ensure sustainability of public finances given low external debt (17¼ percent of GDP, mainly official assistance).
  - Channel increasing resources to investment in priority areas and improve quality of fiscal institutions, including strengthening governance and implementation capacity.
  - Continue structural reforms: privatization, sectoral restructuring, and removing barriers to investment to promote private sector development and complete transition to a modern rules-based market economy.
  - Implement FAD TA recommendations and consider revising or avoiding measures that exceed administrative monitoring capacity (e.g., certain VAT exemptions and complex filing requirements).

*Source: IMF staff report content provided in the supplied document excerpt.*

### Box 3. 2005 Fiscal Package

### Box 3. 2005 Fiscal Package

### Overview and fiscal cost
- The 2005 fiscal package aims at improving revenue administration.
- The cost of the package is about 0.3 percent of GDP in 2005.
- Authorities have adopted a plan to clear VAT refund arrears to exporters (0.1 percent of GDP) and implement a quick refund system in 2005.

### Measures to reduce administrative complexity and tax evasion
- subjecting the first sale of residential units to VAT, while exempting rental payments starting in 2006;
- eliminating the requirement for small businesses to renew their registration every year;
- reducing the number of personal income tax brackets to 5 from 7;
- including social security contributions in the base of the personal income tax;
- introducing personal income tax returns.

### Measures to bring business tax obligations closer to the regional average
- reducing the corporate income tax rate from 25 percent to 23 percent in 2005, and to 20 percent in 2006;
- reducing the small business tax rate on turnover from 4 percent to 3 percent;
- exempting from VAT sub-contractors of re-export companies;
- shortening from 6 to 3 months the obligatory carry-forward period before reimbursement of VAT credit.

### Measures to strengthen taxpayers’ rights
- strengthening appeal procedures with clear steps for appeal escalation and time limits for issuing decisions;
- limiting the response period for VAT refund requests (before interest charges apply) to 30 days;
- introducing accrual of interest on overdue tax refunds.

### Other fiscal and public sector reforms discussed by the mission
- Improve the budget process, expenditure management, and civil service and public pay reform (MEFP ¶13).
- Enhance the medium-term orientation of the budget, including casting it on a rolling multi-year projection.
- Build capacity to manage expenditure and monitor investment projects that extend over the medium term, including by introducing information technology and strengthening public procurement and tendering procedures.
- Staff expressed concern about the Tirana-Rinas-Durrës railway project; recommended that any associated budgetary and financial impact be accommodated within the medium-term expenditure envelope and without undermining the declining path of public debt.
- Wage policy: authorities intend to refrain from granting automatic across-the-board public pay increases in 2005; use wage bill expansion appropriated in the budget to implement targeted wage increments in priority sectors and performance incentives associated with civil service reform.
- Authorities intend to formally repeal the automatic indexation of wages prior to the formulation of the 2006 budget.

### Medium-term debt management and market access considerations
- Medium-term plans aim to maintain the downward course of public debt while preparing to tap international financial markets as concessional assistance declines (Table 8).
- Staff recommended improving debt management and considering steps to obtain a sovereign credit rating to introduce additional policy discipline and facilitate market access for larger domestic firms.
- Authorities agreed but argued for pacing access to international capital markets with improvements in the budget framework to ensure efficient use of additional resources.

### Albania: Medium-Term Fiscal Path (In percent of GDP)
- Overall balance -4.9 -4.9 -4.2 -3.9 -3.6 -3.3
- Domestic financing 4.1 3.3 3.0 2.7 2.7 2.7
  - Privatization receipts 2.0 0.6 0.4 0.2 0.2 0.2
  - Domestic net borrowing 2.0 2.7 2.6 2.5 2.5 2.5
- Foreign financing 0.8 1.6 1.1 1.1 0.9 0.6
- Public debt 55.3 54.5 54.0 54.0 53.1 52.0
  - Domestic 38.0 37.3 36.7 36.5 35.9 35.3
  - External 17.3 17.1 17.2 17.5 17.3 16.8
- Debt service to revenue 1/ 17.6 17.6 16.7 15.6 16.0 15.9

Note: 1/ Revenue excludes grants. Almost none of the domestic debt has a maturity of more than one year.

### Program implementation and conditionality highlights
- Structural conditionality in addition to implementing the 2005 fiscal package focuses on:
  - Reforms of tax administration and the budget and expenditure process, including extending ASYCUDA and implementing ASYCUDA risk assessment module in 5 customs houses; implementing a system of rapid VAT refunds and clearing VAT refunds originated prior to June 2004 with quarterly reports; formally repealing price indexation of wages; carrying out independent feasibility studies for large projects funded by non-concessional borrowing; and completing rescheduling of arrears on inoperative payments agreements with official creditors by the end of the program.
  - Financial development and reduction of the use of cash, governance and business climate measures, including increasing the number of public employees paid through the banking system and implementing the action plan to remove administrative barriers to investment.
  - Quality and coverage of economic statistics: present to Parliament a 5-year statistical program; publish the preliminary 2003 national accounts and introduce pilot quarterly GDP estimates; issue 2004 national accounts.
- The program for 2005 is fully financed. The 2005 financing gap (US$ 82 million) is expected to be covered with donors assistance and bilateral arrears rescheduling.
- Authorities are committed to clear all remaining debit balances with official creditors by the end of the program and with private creditors by 2006.

*Source: _cr0589 - Box 3. 2005 Fiscal Package*

### 40.      The outlook is for a continuation of growth at about its 6 percent trend in

### _cr0589 - 40.      The outlook is for a continuation of growth at about its 6 percent trend in

### Outlook and near-term risks
- Growth outlook: continuation of growth at about its 6 percent trend in 2005.
- Near-term demand drivers: public investment and rising credit to the private sector from its current low level, including consumer credit.
- Downside risks: political uncertainties; less stimulative external environment; real effective appreciation of the lek that "may have eroded competitiveness in some sectors."

### Medium-term prospects and external sustainability
- Export-led growth: over the medium term, export-oriented investment and associated productivity are expected to gradually improve the trade balance and increasingly drive growth.
- External sustainability: although external indebtedness is limited, DSAs confirm that external sustainability "hinges on successfully improving competitiveness and maintaining growth."
- Complementary reforms needed: macroeconomic stability must be complemented with improvements in infrastructure and the investment environment, plus institutional reforms to promote establishment and protection of property rights and complete the transition to a rules-based market economy.

### Monetary policy framework and financial sector development
- Monetary framework strengths: clear Bank of Albania (BoA) mandate on price and financial stability; central bank independence; flexible exchange rate regime.
- FX intervention guidance: credibility requires that BoA’s foreign exchange interventions continue avoiding any explicit or implicit exchange rate target.
- Market infrastructure reforms: plans to introduce a bulk clearing system and a collateralized inter-bank money market; measures to deepen the T-bill market and allow trading of foreign exchange swaps.
- Supervisory capacity: ongoing expansion of financial intermediation will require improvements in supervisory capacity, encompassing the insurance sector; the upcoming FSAP will provide an opportunity.
- Payments reform catalyst: payment of government wages through the banking system will be an important catalyst to reduce cash use and informality.

### Monetary stance and near-term policy direction
- Recent stance: gradual easing of the monetary policy stance since 2002 has been appropriate; current pause and neutral bias are warranted.
- 2005 guidance: "there may be further room for easing in 2005 if current trends continue," but policy direction should be reconsidered as more evidence emerges on seasonal price pressures, fuel price effects, and international conditions.

### Fiscal consolidation, budget strategy, and public finances
- Fiscal progress: much progress in consolidating public finances; the 2005 budget is a further step.
- Debt and borrowing: continued reduction in the underlying domestic borrowing requirement and declining profile of public debt aimed to crowd in private sector credit and anticipate a likely decline of concessional assistance.
- Expenditure quality: budget emphasis to curtail current spending to levels commensurate with realistic recurrent revenue projections, devoting borrowing and privatization resources to invest.
- Wage policy: decision to replace across-the-board wage increases with targeted incentives and to formally repeal wage indexation before the 2006 budget to enhance expenditure efficiency.
- Elections note: in an election year, authorities’ determination to persevere at fiscal consolidation and improve the budget process is commended.

### Public financial management and revenue administration reforms needed
- Capacity and institutional gaps: progress in capacity building and fiscal institutions reform has been weak and needs acceleration.
- Tax administration priorities: introduction of an effective VAT refund mechanism should be a priority to reduce export costs; broader reforms needed including standardized procedures, risk analysis-based audit methods, information technology, and human resource rationalization.
- Spending-side reforms: strengthen control and tendering procedures; payment, commitment and reporting systems; and treasury and debt management.

### Structural reforms, privatization, and statistics
- Privatization wins: start of privatization of Albtelecom and ARMO; decision to sell minority public stakes in banking and telecommunications; end of Albtelecom monopoly on international communications.
- Remaining reforms: need to restructure water provision system and other utilities to ensure viability and avoid inter-enterprise arrears.
- Statistics: data provision to the Fund is adequate; plans to expedite and improve production of economic statistics are welcomed and should be a priority.

### Program implementation and forward-looking programmatic advice
- Program performance: program implementation has been good; supplementary MEFP contains a strong policy program to preserve macroeconomic stability and foster growth.
- Arrears and creditor engagement: authorities continued appropriate good-faith efforts to reach agreements with official and private external creditors on remaining arrears.
- Fund requests supported: staff supports the authorities’ request for completion of the fifth review and financing assurances review, and for a 5-month extension of the program to allow for the sixth review and associated disbursement during the program period.
- Consultation cycle and successor arrangement: proposal that Albania be kept on a 24-month Article IV consultation cycle, subject to Board decision number 127-94 (02/76). Given the extensive reform agenda and authorities’ preference, a successor medium-term arrangement appears appropriate; its nature would depend on Albania’s PRGF eligibility following expiration of the current arrangement.

### Selected quantitative indicators and projections (as reported)
- Growth: "about its 6 percent trend in 2005."
- Real GDP (selected series from Table 1): 2000: 2/7.3; 2001: 7.2; 2002: 3.4; 2003: 6.0; 2004: 6.2; 2005 (Proj.): 5.9; 2006 (Proj.): 6.0; 2007 (Proj.): 6.0; 2008 (Proj.): 6.0; 2009 (Proj.): 6.0.
- Retail prices (avg.): 2000: 0.0; 2001: 3.1; 2002: 5.2; 2003: 2.4; 2004: 3.4; 2005 (Proj.): 2.9; 2006 (Proj.): 3.0; 2007 (Proj.): 2.4; 2008 (Proj.): 3.0; 2009 (Proj.): 3.0.
- Foreign savings (percent of GDP): 2000: 4/4.4; 2001: 3.3; 2002: 7.0; 2003: 5.6; 2004: 5.9; 2005 (Proj.): 5.0; 2006 (Proj.): 5.6; 2007 (Proj.): 5.3; 2008 (Proj.): 4.0; 2009 (Proj.): 4.5; 2010 (Proj. in table context): 4.1; 2011: 4.3.
- Domestic savings (percent of GDP): 2000: 20.3; 2001: 25.9; 2002: 19.2; 2003: 19.4; 2004: 23.0; 2005 (Proj.): 20.4; 2006: 22.5; 2007: 21.3; 2008: 21.8; 2009: 23.1; 2010: 24.1; 2011: 24.4.
- Investment (percent of GDP): 2000: 24.7; 2001: 29.2; 2002: 26.2; 2003: 25.0; 2004: 28.9; 2005 (Proj.): 25.4; 2006: 28.1; 2007: 26.6; 2008: 26.7; 2009: 27.5; 2010: 28.3; 2011: 28.6.
- Public sector debt (percent of GDP): 2000: 71.3; 2001: 66.8; 2002: 64.8; 2003: 60.7; 2004: 58.6; 2005 (Proj.): 55.3; 2006 (Proj.): 57.9; 2007 (Proj.): 54.5; 2008 (Proj.): 54.0; 2009 (Proj.): 54.0; 2010: 53.1; 2011: 52.0.
- Gross international reserves (in millions of U.S. dollars): 2000: 608; 2001: 737; 2002: 860; 2003: 1,026; 2004: 1,131; 2005 (Proj.): 1,374; 2006: 1,227; 2007: 1,459; 2008: 1,624; 2009: 1,830; 2010: 2,069; 2011: 2,211.
- Memorandum social indicators: GNI per capita (2003, est.): $1,740; population 3.1 million (2002); life expectancy at birth (2000): 74 years; population living below the poverty line (2002): 25.4 percent; rural households with access to running water inside dwellings (2002): 25 percent; urban households (excluding Tirana) with water for less than 6 hrs/day (2002): 33 percent; households receiving continuous supply of electricity (2002): 14.3 percent.

*Source: IMF staff report excerpt (pages 26–33).*

### 45. Unemployment rate91316.8.........

### 45. Unemployment rate91316.8.........

### Unemployment rates (by sex)
- Female81214.8.........
- Male111519.3.........

### Millennium Development Goal targets referenced
- Target 17: Provide access to affordable essential drugs
  - 46. Proportion of population with access to affordable drugs..................
- Target 18: Make available new technologies especially information and communications
  - 47. Fixed line and mobile telephones (per 1,000 people)12.613.4191.2347.7......
  - 48. Personal computers (per 1,000 people)...1.69.711.7......

### Data sources
- Source: World Bank and Fund staff estimates
- Note: 1/ Targets 12-15 and indicators 33-44 are excluded because they cannot be measured on a country-specific basis. These are related to official development assistance, market access, and the HIPC initiative.

### Balance of Payments (In millions of US dollars) — selected line items and aggregates (2001–2009; quarterly detail for 2004–2005)
- Current account -262-435-469-97-146-105-179-592-528-635-625-638-623-638-695
- Balance of goods and services-950    -1,160    -1,419-320-370-467-566    -1,695    -1,723    -1,859    -1,974    -2,018    -2,077    -2,223    -2,393
- Exports8399151,1673333914724331,3641,6291,5012,0402,4082,8453,3253,883
  - Goods3053304471371531581605676087507619251,1171,3181,537
  - Services5355857201972383142727971,0217511,2801,4831,7282,0072,346
- Imports1,7902,0752,5866537619399993,0593,3523,3604,0144,4264,9225,5486,277
  - Goods1,3321,4851,7834505236286822,1682,2832,3982,7002,9993,3733,8224,292
  - Services4585908022032383113178911,0699621,3141,4281,5481,7261,984
- Income balance 14612816729235837164147210154155167209226
  - of which: Interest due 142119  4  7  5122527384456688187
- Private transfers5435977821942013043509391,0481,0141,1951,2251,2861,3761,473
- Capital account2804064515326919636364046497788008879731,007
  - Official transfers 12312514636403935162149184157156160167166
  - Direct investment204135178351776450377326252308339407487565
  - Other capital-1305343-3640-100-38-29-13490216220237226216
- Private loans (incl.net trade credits, net)-11124835422383108447274778389
- Other financial flows -1294218-445-142-61-112-24246144146160143126
  - of which: Change in NFA of commercial banks (incr = -) -1294228-445-142-61-112-24246144146160143126
- Official medium- and long-term loans (net)83938518121716126631229685849360
  - New borrowing 9012111425252429178102207177202212223208
    - Multilateral loans 5684852120181712076128139144138138121
      - World Bank 3450429101055033586540404040
      - EBRD4111533452515252747403427
      - Other18222788584528454757586454
    - Bilateral loans 343730445125826783859748587
  - Amortization (official and private loans)-7-28-30-6-13-7-14-52-40-85-81-117-128-130-147
- Errors and omissions1094711654-11751613039047-1011-48-86-161
- Net balance1271898101238945732666152163216249151
- Financing requirement-127-18-98-10-123-89-45-73-266-61-52-163-216-249-151
- Available financing-127-18-98-10-123-90-43-73-266-61-52-163-216-249-151
  - Change in net reserves (increase = -) 2/-135-50-118-10-123-90-61-98-285-103-94-177-221-254-156
    - Of which: Change in gross reserves, (increase = -) 2/ -146-58-78-15-117-95-61-107-288-95-85-165-206-239-142
  - Use of Fund Resources (net)-1-924-24-4-32-9-10-12-14-15-14
  - Budget support42919000000000000
  - Changes in arrears (increase = +) 3/-29-28010-1700-59-17-37-62-44000
  - Overdue debt forgiveness 102070000000000000
  - Rescheduling 3/23760017005917000000
  - Identified Financing 00000018251811220000
    - Of which: IMF PRGF 00000006011120000
    - WB FSAC/PRSC0000001819180100000
- Financing gap 000001-2006882585 55
- Expected EU Macro-Financial Assistance...........................312013000
- Arrears Rescheduling ...........................376244000
- Other...........................000555

### Memorandum items (exact figures)
- Gross usable reserves 7378601,0261,0281,1401,2441,3741,1331,3741,2271,4591,6241,8302,0692,211
  - (months of imports of goods and services)4.34.03.7............4.04.14.04.04.04.04.04.0
- Balance of goods and services (percent of GDP)-23.2-25.8-24.8............-23.1-22.9-23.0-22.2-20.8-19.9-19.5-19.3
- Current account (percent of GDP)-6.4-9.7-8.2............-8.1-7.0-7.9-7.0-6.6-6.0-5.6-5.6
- Debt service (percent of exports of goods and services) 4/4.26.44.7............5.84.15.94.65.35.05.14.9
- Debt service (percent of central government revenues) 4/3.85.64.2............4.34.04.34.85.96.06.56.6
- Total external debt stock (percent of GDP) 5, 6/27.825.121.7............22.519.522.419.519.319.118.718.0
- Export volumes (percent change) 23.46.419.9............17.225.314.724.522.221.017.115.7
- Import volumes (percent change)25.98.17.5............13.813.910.117.712.312.912.911.4

### Performance criteria and structural benchmarks (Fifth Review)
- A. Performance Criteria for the Fifth Review
  - 1. The salaries of 3,500 Government employees and of all the employees of the Bank of Albania to be paid through the banking system — Test-date: End-September 2004 — Status: Met
  - 2. The salaries of at least 10,000 employees of budgetary institutions to be paid through the banking system — Test-date: End-December 2004 — Status: Met
- B. Structural Benchmarks under the Fifth Review
  - 1. Strengthen tax and customs administration through:
    - (i) Improving the VAT refunds process by reporting on the stock of VAT refunds claimed and refunds paid out every month; — Status: Ongoing — Met in part 1/
    - (ii) Redrafting the instructions, decisions and laws on tax procedure, the income tax and the VAT to make them all internally consistent, as part of the 2005 fiscal package. — Test-date: End-October 2004 — Status: Met
  - 2. Government to implement a subsidy to low income electricity consumers — Test-date: End-September 2004 — Status: Met
  - 3. Government of Albania's to continue to implement its action plan for removing administrative barriers to investment (NSSED chapter 7, Section on Ministry of the Economy). — Status: Ongoing — Met
  - 4. Prepare quarterly reports (within one month of the end of each quarter) on the stock of external arrears. — Status: Throughout — Met

*Source: _cr0589 - 45. Unemployment rate91316.8.........*

### 5. Safeguard the efficient use of nonconcessional foreign project loans through:

### _cr0589 - 5. Safeguard the efficient use of nonconcessional foreign project loans through:

### Safeguards and Monitoring (project-financing)
- (i) Conducting an independent feasibility study for any large project (as defined in the TMU) financed through non-concessional borrowing. — Met
- (ii) Provide a quarterly listing and status report on all projects being considered for nonconcessional foreign financing. — Met
- Note: "Data on VAT refunds were only available for the total since the beginning of the year and not with a monthly breakdown. The other required information was available."

### Key fiscal aggregates and projections (selected lines from Table 4: Albania: Performance Criteria and Structural Benchmarks under the PRGF Arrangement)
- Total Revenue and Grants (percent of GDP): 24.5, 24.0, 24.8, 23.7, 24.1, 23.9, 24.1, 24.4, 24.7
- Tax Revenue (percent of GDP): 20.5, 20.9, 21.6, 21.3, 21.3, 21.2, 21.5, 21.8, 22.1
- Total Expenditure (percent of GDP): 31.1, 28.5, 30.9, 28.5, 29.0, 28.1, 28.0, 28.1, 28.0
- Current Expenditure (percent of GDP): 24.5, 24.1, 23.8, 23.4, 22.7, 22.1, 21.7, 21.4, 21.1
- Capital Expenditure (percent of GDP): 6.7, 4.5, 6.6, 5.2, 5.9, 5.5, 5.8, 6.3, 6.6
- Cash Balance (percent of GDP): -6.6, -4.4, -6.2, -4.9, -4.9, -4.2, -3.9, -3.6, -3.3
- Current Balance (percent of GDP): -0.7, -0.5, 0.1, -0.1, 0.5, 1.0, 1.6, 2.3, 3.0
- Financing (percent of GDP): 6.6, 4.4, 6.2, 4.9, 4.9, 4.2, 3.9, 3.6, 3.3
- Public Debt (including guarantees) (percent of GDP): 64.8, 60.7, 58.6, 55.3, 54.5, 54.0, 54.0, 53.1, 52.0
  - Domestic general government (percent of GDP): 41.4, 40.4, 38.3, 38.0, 37.3, 36.7, 36.5, 35.9, 35.3
  - External (percent of GDP): 23.4, 20.3, 20.3, 17.3, 17.3, 17.2, 17.5, 17.3, 16.8
- Memorandum: GDP (in billion of lek): 630, 695, 780, 780, 857, 939, 1,015, 1,113, 1,220

### General government (levels and percent of GDP) — selected highlights from Tables 5a/5b
- Total Revenue and Grants (in billions of Lek): 154.6, 167.2, 193.1, 184.5, 206.5, 224.2, 244.4, 271.7, 301.0
- Total Expenditure (in billions of Lek): 196.0, 198.1, 241.2, 222.4, 248.7, 263.4, 283.8, 312.4, 341.8
- Primary balance (percent of GDP): -16.6, -1.1, -17.0, -8.9, -12.3, -8.1, -6.9, -4.8, -1.9
- Public Debt (including guarantees) (in percent of GDP, Table 5a memo): 408.2, 421.6, 457.2, 431.6, 466.9, 506.9, 548.1, 591.7, 635.2
  - Note: Table 5a presents government operations in absolute terms (billion Lek) and percent of GDP across years.

### Priority expenditure (Table 6 — selected lines)
- Total priority expenditure (Lek millions): 42,862; 52,230; 69,745; 74,723; 82,843; 90,260; 100,454; 121,637; 125,311
- Education (Lek millions): 11,197; 13,612; 16,850; 17,192; 19,488; 19,034; 21,269; 28,721; 25,783
- Health (Lek millions): 6,269; 7,985; 12,066; 12,334; 12,027; 13,719; 15,699; 20,907; 22,144
- Education (percent of GDP): 3.5, 3.3, 3.6, 3.2, 3.3, 3.0, 3.1, 3.7, 3.0
- Total priority expenditure (percent of GDP): 13.3, 12.7, 14.7, 14.1, 14.1, 14.3, 14.5, 15.6, 14.6
- Memorandum: GDP (Lek mns.) — 322,186; 412,326; 474,291; 530,906; 588,664; 630,000; 695,068; 780,100; 857,300

### Monetary aggregates and banking-sector indicators (selected from Table 7)
- Broad money (end-period, billions of Lek): 408.1, 443.5, 450.2, 452.6, 483.1, 495.8, 499.3, 504.5, 544.9, 546.0, 607.5, 672.4, 681.4, 775.5, 882.3
- Currency outside banks (billions of Lek): 130.8, 125.2, 117.2, 118.2, 126.2, 135.0, 135.8, 132.7, 147.8, 144.9, 160.4, 181.0, 175.8, 195.4, 213.5
- Deposits (billions of Lek): 277.4, 318.3, 333.0, 334.4, 356.8, 360.8, 363.5, 371.8, 397.1, 401.0, 447.1, 491.3, 505.6, 580.1, 668.8
  - Domestic currency deposits: 190.8, 226.1, 236.6, 237.0, 247.0, 247.8, 253.6, 260.0, 276.1, 280.1, 316.3, 354.4, 362.1, 416.3, 481.8
  - Foreign currency deposits: 86.5, 92.2, 96.4, 97.4, 109.8, 113.0, 109.9, 111.8, 121.0, 120.9, 130.8, 136.9, 143.4, 163.7, 187.0
- Net foreign assets (billions of Lek): 164.4, 161.8, 165.8, 170.2, 193.7, 185.2, 194.4, 190.4, 189.7, 196.3, 200.5, 194.3, 207.6, 219.6, 223.8
  - Bank of Albania (NFA): 96.9, 99.8, 99.1, 107.1, 116.5, 111.3, 117.9, 117.7, 120.9, 130.7, 148.6, 137.5, 170.9, 196.8, 213.4
  - Commercial Banks (NFA): 67.5, 62.0, 66.7, 63.1, 77.3, 73.9, 76.5, 72.7, 68.9, 65.6, 51.9, 56.8, 36.6, 22.8, 10.5
- Claims on the private sector (billions of Lek): 39.9, 52.3, 54.9, 58.2, 62.4, 68.7, 69.5, 75.3, 93.1, 97.4, 133.0, 173.8, 177.2, 234.2, 309.0
- Annual broad money growth (percent): 5.7, 8.7, 9.5, 7.3, 10.5, 11.8, 12.6, 12.1, 9.9, 9.3, 11.3, 11.8, 12.2, 13.8, 13.8
- Annual growth in private sector credit (percent): 41.0, 31.1, 31.6, 26.5, 25.7, 31.3, 32.9, 37.3, 35.5, 40.1, 36.6, 34.7, 33.2, 32.2, 31.9
- Gross reserves (millions of U.S. dollars): 860, 1,026, 1,028, 1,140, 1,244, 1,132, 1,374, 1,331, 1,227, 1,459, 1,624, 1,384, 1,830, 2,069, 2,211
- Currency/Broad Money ratio (percent): 32.0, 28.2, 26.0, 26.1, 26.1, 27.2, 27.2, 26.3, 27.1, 26.5, 26.4, 26.9, 25.8, 25.2, 24.2

### External financing, debt, and vulnerability (selected tables)
- External public and publicly guaranteed debt stock (Table 8, in millions of U.S. dollars): total public and publicly guaranteed debt: 877, 1,007, 1,108, 1,173, 1,198, 1,190, 1,408, 1,446
- Total debt (percent of GDP, Table 10 memo): 40.8, 34.5, 31.6, 31.8, 27.8, 25.3, 21.6, 17.2 (note: series spans multiple tables; reference years vary)
- Current account (selected projections, Table 9): current account (levels in millions of U.S. dollars) — 26, 24, 35, 46, 95, 28, 62, 86, 25, 63 (table presents multi-year flows and projections)
- External financing requirement and available financing (Table 9, selected lines):
  - Total financing requirement (millions of U.S. dollars): 457, 814, 585, 882, 862, 976, 972
  - Available financing (millions of U.S. dollars): 457, 814, 585, 882, 780, 918, 967
  - Official grants (millions of U.S. dollars): 123, 125, 146, 149, 157, 156, 160
  - Foreign direct investment (millions of U.S. dollars): 204, 135, 178, 326, 308, 339, 407

### Policy implications and operational notes (implicit in presented data)
- The two specified safeguard actions for nonconcessional foreign project loans were implemented ("Met"), supporting strengthened project selection and monitoring.
- Fiscal stance shows a pattern of negative cash balances and reliance on financing; public-debt-to-GDP ratios and domestic/external composition are explicitly provided for policy calibration.
- Rapid private-sector credit growth and increasing broad money point to continued monitoring needs for financial stability given rising claims on the private sector and robust reserve accumulation.

*Source: Albanian authorities; and Fund staff estimates and projections (tables and text from the supplied IMF document).*

### 1. Princi

### _cr0589 - 1. Princi

### Projected Payments to the Fund (as of December, 2004)
- Table 11: Albania: Projected Payments to the Fund (in millions of SDRs)
  - PRGF Repayments (principal) by year: 6.2, 6.8, 6.4, 6.2, 7.6, 9.4, 9.6, 9.1
  - GRA repurchases: 4.4, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0
  - PRGF Interest (charges) by year: 0.3, 0.2, 0.3, 0.3, 0.2, 0.2, 0.2, 0.1
  - SDR Net Charges by year: 0.1, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0
  - Total Obligations by year: 11.0, 7.0, 6.7, 6.4, 7.8, 9.6, 9.8, 9.2
  - Total Obligations (percent of quota) by year: 23, 14, 14, 13, 16, 20, 20, 19
- Outstanding Fund credit (end-of-year values): 59.6, 60.8, 62.4, 64.3, 56.7, 47.3, 37.6, 28.5
- Note: 1/ Projections are based on current interest rates for PRGF. The current SDR interest rate is assumed for net use of SDRs. 2/ End of year value.

### Indicators of Fund Credit, 1998–2004 (Table 12)
- Outstanding credit by arrangement (SDR million):
  - Stand-By Arrangement: 8.8, 8.8, 8.8, 4.4, 0.0, 0.0, 0.0
  - ESAF/PRGF: 36.9, 49.9, 58.6, 61.8, 59.6, 60.8, 62.4
  - Total outstanding: 45.8, 58.7, 67.5, 66.3, 59.6, 60.8, 62.4
- In percent of quota: 129.7, 120.5, 138.5, 136.0, 122.4, 124.9, 128.2
- In percent of exports (GNFS): 22.0, 13.5, 12.6, 10.0, 8.4, 7.3, 5.4
- In percent of total public external debt: 6.2, 7.2, 7.6, 7.0, 6.6, 6.0, 5.7
- Purchases and Disbursements (ESAF/PRGF): 5.9, 15.5, 14.3, 9.4, 4.0, 8.0, 8.0
  - Total purchases and disbursements: 5.9, 15.5, 14.3, 9.4, 4.0, 8.0, 8.0
  - In percent of quota: 16.7, 31.8, 29.3, 19.3, 8.2, 16.4, 16.4
  - In percent of exports (GNFS): 2.8, 3.6, 2.7, 1.4, 0.6, 1.0, 0.7
- Debt service (millions of SDRs):
  - Principal: 0.9, 2.5, 5.5, 10.6, 10.6, 6.8, 6.4
  - Interest and charges: 0.6, 0.6, 0.7, 0.7, 0.4, 0.3, 0.3
  - Total: 1.4, 3.1, 6.2, 11.3, 11.0, 7.1, 6.7
  - In percent of exports (GNFS): 0.70, 0.71, 1.21, 1.71, 1.60, 0.90, 0.60
  - In percent of total external debt service: 7.6, 17.3, 29.4, 41.8, 24.5, 18.2, 12.4
- Net Fund Financing by year: 4.4, 12.3, 8.0, -1.9, -7.0, 0.9, 1.3

Memorandum items (exact values):
- Exchange Rate (US dollars per SDR): 1.36, 1.37, 1.32, 1.27, 1.30, 1.40, 1.41
- Quota (in millions of SDRs): 35.3, 48.7, 48.7, 48.7, 48.7, 48.7, 48.7
- Exports of GNFS (in millions of US dollars): 281.6, 593.7, 705.5, 839.5, 915.2, 1167.1, 1609.9
- Public external debt (millions of US dollars) 1/: 1006.7, 1108.3, 1172.6, 1198.4, 1178.2, 1408.6, 1549.4
- External debt service (millions of US dollars): 25.8, 24.6, 28.0, 34.3, 58.2, 54.6, 67.1
- Source: Albanian authorities, Fund staff estimates.
- 1/ Includes IMF and arrears.

### Schedule of Disbursements Under PRGF Arrangement (Table 13)
- Amounts in millions of SDRs and in percent of quota:
  - June 2002: 4.0 (8.2 percent of quota) — Board approval of PRGF arrangement
  - January 2003: 4.0 (8.2 percent) — Observance of end-September 2002 performance criteria and completion of first review
  - July 2003: 4.0 (8.2 percent) — Observance of end-March 2003 performance criteria and completion of second review
  - January 2004: 4.0 (8.2 percent) — Observance of end-September 2003 performance criteria and completion of third review
  - July 2004: 4.0 (8.2 percent) — Observance of end-March 2004 performance criteria and completion of fourth review
  - March 2005: 4.0 (8.2 percent) — Observance of end-September 2004 performance criteria and completion of fifth review
  - October 2005 2/: 4.0 (8.2 percent) — Observance of end-March 2005 performance criteria and completion of sixth review
  - Total: 28.0 (57.4 percent of quota)
- 1/ Albania's quota is SDR 48.7 million.
- 2/ Assumes an extension of the program until November 2005.

### Albania: Fund Relations (As of December 31, 2004) — Key Financial and Institutional Data
- I. Membership Status: Joined: 10/15/1991; Article XIV
- II. General Resources Account (SDR Million):
  - Quota: 48.70 (100.00 percent)
  - Fund Holdings of Currency: 45.35 (93.12 percent)
  - Reserve position in Fund: 3.35 (6.89 percent)
- III. SDR Department (SDR Million):
  - Holdings: 64.90 (N/A percent); Allocation not listed beyond headings
- IV. Outstanding Purchases and Loans (SDR Million; percent of quota):
  - PRGF arrangements: 62.43 (128.20 percent)
- V. Financial Arrangements (Approval, Expiration, Amount Approved, Amount Drawn):
  - PRGF 06/21/2002 — 06/20/2005 — Amount Approved 28.00 — Amount Drawn 20.00
  - PRGF 05/13/1998 — 07/31/2001 — Amount Approved 45.04 — Amount Drawn 45.04
  - PRGF 07/14/1993 — 07/13/1996 — Amount Approved 42.36 — Amount Drawn 31.06

### Projected Obligations to Fund (SDR Million; based on existing use of resources and present holdings of SDRs)
- Forthcoming obligations by period:
  - 2005–2006:
    - Principal: 6.17
    - Charges/Interest: 0.30
    - Total: 6.47
  - 2007–2008:
    - Principal: 7.60
    - Charges/Interest: 0.26
    - Total: 7.86
  - 2009:
    - Principal: 9.4
    - Charges/Interest: 0.22
    - Total: 9.63
  - Forthcoming later period(s):
    - Principal: 9.6
    - Charges/Interest: 0.17
    - Total: 9.79
  - Final listed period:
    - Principal: 9.0
    - Charges/Interest: 0.12
    - Total: 9.21

### Safeguards Assessments
- A full safeguards assessment of the Bank of Albania (BoA) with respect to the PRGF arrangement was finalized in June 2002.
- The assessment considered prior safeguards work (May 2001 assessment report and March 2002 monitoring mission).
- Findings:
  - BoA has made significant progress in implementing recommendations from the first safeguards assessment.
  - In general, the bank has adequate safeguards to reduce risk of misuse and misreporting of Fund resources.
  - Minor weaknesses identified in internal auditing, financial reporting, and internal control systems; BoA management agreed to address these weaknesses.

### Exchange Rate Arrangement
- On July 1, 1992 Albania adopted a floating exchange rate system (an independent float).
- Fund de facto classification: independently floating exchange rate regime, with occasional interventions to smooth temporary fluctuations.
- Albania’s exchange rate arrangement is free from exchange restrictions and multiple currency practices under Article VIII; country avails transitional arrangements under Article XIV due to outstanding debit balances on inoperative bilateral payment agreements predating membership.
- Exchange rate: 92.7 lek per U.S. dollar on December 31, 2004.

### Article IV Consultation and Surveillance
- Conclusion of the 2002 Article IV consultation and the first review under the three-year PRGF arrangement: February 2003 (IMF Country Report No. 03/63).
- Albania moved from a 12-month to a 24-month consultation cycle in line with the July 15, 2002 decision on consultation cycles.

### FSAP Participation, ROSCs, and Data Dissemination
- An FSAP scheduled for early 2005.
- A ROSC on data dissemination published May 2000.
- A fiscal ROSC completed June 2003.
- Albania participates in the General Data Dissemination System (GDDS); a complete set of GDDS metadata for external, financial, fiscal, real sectors and socio-demographic indicators is posted on the Fund’s Dissemination Standards Bulletin Board.

### Technical Assistance and Resident Representation
- The Fund, other multilateral organizations and donors have provided extensive technical assistance for institutional development in Albania; the Fund has sent several technical assistance missions every year since 1991.
- Further institutional development required in virtually every sector.
- Resident representative posted in Tirana since April 1993; Mr. Jan-Peter Olters has held the position since March 2002.

### IMF–World Bank Relations and Partnership in Albania’s Development Strategy (Appendix II)
- National Strategy for Socio-Economic Development (NSSED): presented June 2002; updated May 2003 and June 2004.
  - Two pillars: strengthening governance and achieving high economic growth.
  - Priorities: improving education, healthcare, and infrastructure.
- IMF role: lead on macroeconomic stability and financial sustainability via PRGF-supported program (2002 and subsequent reviews in February 2003, July 2003, January 2004).
  - Structural conditionality focuses on: fiscal management and control; payments discipline; governance; privatization.
- World Bank role: lead dialogue on financial sector reforms, power sector reforms, social sector and pension reforms, public expenditure management, and public administration reform; close collaboration with IMF on implementation.

Bank Group Strategy — priorities and operations:
- Three priorities:
  - Improve governance and strengthen institutions (transparency, accountability, contestability of policy formulation, policy monitoring and evaluation).
  - Promote sustainable private sector growth (environment for private sector, financial sector reforms, agricultural growth, infrastructure, environmentally sustainable use of natural resources).
  - Foster human development (access and quality of education and healthcare, social insurance sustainability and equity, targeting and efficacy of social assistance and community social services).
- To date, Bank approved 55 operations amounting to US$764 million; US$605.9 millions disbursed.
- For FY05, Bank plans continued investment lending and country analytic work supporting the NSSED; up to 4 possible investment operations in power, transport, and environment expected before July 2005.
- PRSC series:
  - PRSC-1: Board June 2002
  - PRSC-2: July 2003
  - PRSC-3: early December 2004; disbursement of PRSC3 took place at end December 2004
  - PRSCs focus: promoting sustainable growth and private sector development; strengthening capacity to monitor and evaluate policy agenda; improving service delivery and social safety net effectiveness; improving core public functions and institutional arrangements.
  - PRSCs and investment operations are complementary.

Bank–Fund Collaboration in Specific Areas
- Financial sector reforms:
  - Post-1997 reforms to divest state from banking and insurance sectors, establish governance structures.
  - Financial Sector Adjustment Credit (FSAC) approved June 2002: supported privatization of the Savings Bank, development of deposit insurance, improvement of bankruptcy framework and collateral enforcement, strengthening bank regulation and supervision, and anti-money laundering efforts.
  - IMF provided technical assistance to the Bank of Albania and funded a resident adviser for banking supervision institutional development.
  - Privatization of the Savings Bank: January 2004.
  - Second and final tranche of FSAC disbursed on December 24, 2004; Government confirmed commitment to continue reforms beyond FSAC Closing Date of December 31, 2004.
  - Upcoming FSAP to define a structured program of reform supported by the Bank and IMF.
- Power sector:
  - Since mid-2000, severe electricity shortages with large Government subsidies for imports.
  - Causes: excessive demand (illegal use and nonpayment), dry hydrological cycle affecting hydropower system, transmission capacity constraints limiting imports.
  - Government-developed multi-year power sector action plan (end-2000 onward) objectives: curtail illegal use; improve financial situation of KESH; reduce excessive demand and budgetary subsidies; increase domestic generating capacity.
  - Action plan implementation largely successful; further investments required to increase generation capacity and upgrade transmission/distribution network.
  - Power sector action plan for 2005–2007 recently finalized.
  - Bank coordinated donor stance, assisted Government policy, and included conditionality in the Power Sector Rehabilitation and Restructuring Project (Board approval June 2002).
  - New thermal generation investment supported by Bank project approved March 2004, with cofinancing from EBRD and EIB.
- Social sectors and pension reform:
  - Pension reform aims to reduce reliance on budget transfers and address coverage, affordability, equity, adequacy.
  - Social Insurance Institute (SII) reports deficit fell to 0.25 percent of GDP in 2003 from 3.3 percent of GDP in 1993.
  - State budget now finances unemployment and maternity benefits for which SII collects contributions.
  - 2002 projections showed deficits would have increased in absence of reforms.
  - Fund emphasized pension reform as key to medium-term fiscal consolidation and provided policy advice.
  - Bank focused on pension reform under PRSC program; agreed comprehensive parametric reforms including:
    - increasing retirement age for men and women;
    - reducing contribution rates for employees’ pensions and other social insurance benefits;
    - changing base for assessing contributions to increase collections for employees’ pensions;
    - improving performance in collecting pension contributions;
    - narrowing pension level gap for self-employed rural and urban workers and increasing real levels;
    - raising contribution rates for self-employed rural workers (currently extremely low).
  - Bank and Fund fully support the adopted approach.

*Source: _cr0589 - 1. Princi (IMF country material, December 31, 2004).*

### APPENDIX                                                                        II

### APPENDIX II

### Social sectors: health, education, and social protection
- Albania’s ability to ensure the health and welfare of its population has been compromised by:
  - weak physical infrastructure;
  - major shifts in demography including significant population movements;
  - internal and regional instability;
  - limited governance capacity;
  - poor resource management; and
  - weak technical capabilities.
- Restructuring and reform of basic social services is a priority element of poverty reduction.
- Government program priorities:
  - address under-funding in health and education by increasing budgetary allocations to these sectors under the Medium-Term Budget Program (MTBP);
  - outline reforms to improve access and quality of education and health; and
  - improve targeting efficiency of social protection.
- Role of the Fund and the Bank:
  - The Fund has addressed related measures during its regular review of the budget and the MTBP and monitors the budgetary impacts of social sector reform as part of its regular dialogue with the Government.
  - The Bank supports a comprehensive program of sector reforms through the PRSC, specific investment loans (for the human development sectors and public administration reform), and a program of economic and sector work.
  - The Bank program focuses on strengthening sector management to improve the Government’s ability to develop, monitor, and evaluate an effective policy agenda.
  - Social sector conditionality is fully incorporated within the Bank-supported PRSC program.
- Other Bank work:
  - The Bank completed and submitted to Government for comments a comprehensive SSNS (Social Safety Net Study) in November 2004.

### Public expenditure management
- Key challenges:
  - ensuring that Government efforts create a transparent budget decision making process become self-sustaining;
  - improving the usefulness, quality, and timeliness of information upon which budget decisions are made; and
  - enhancing budget execution transparency and accountability mechanisms, including audit mechanisms.
- Government actions and priorities:
  - continue to make the MTBP the centerpiece of the budget formulation process to prioritize expenditures more efficiently and to strengthen linkages between policy objectives and budget planning;
  - link the preparation of the NSSED with the preparation of the MTBP (as a first step and as part of the PRSC);
  - continue work to improve the linkages of the annual budget with the MTBP, and the latter with the NSSED (an important focus of both the Bank and the Fund).
- Specific commitments under the PRSC to improve public expenditure management and NSSED program effectiveness:
  - prepare an action plan for strengthening budget systems, procedures, and monitoring of budget outputs;
  - train budget staff in line ministries; and
  - prepare procedures for recording disbursement and expenditures on all externally-financed projects, including those financed by grants.

*Source: _cr0589 - APPENDIX II*

### APPENDIX                                                                        II

### APPENDIX II

### PRGF-supported program: fiscal and governance measures
- Program complements Government measures by focusing on fiscal management and control, payment discipline, and mobilizing adequate resources for expenditure priorities under the NSSED.
- Key program elements:
  - Strengthening tax and customs revenues.
  - Improving budget control of foreign-financed projects and state-owned enterprises.
  - Regularizing inter-enterprise and external arrears to address contingent budget liabilities, improve payment discipline, and strengthen debt management.
- Expected macroeconomic impact:
  - Measures judged essential for safeguarding the programmed fiscal adjustment.
  - Together with monetary and exchange rate policy of the PRGF-supported program, expected to help ensure a sound macroeconomic environment for sustainable growth.

### Statistical issues: progress, gaps, and technical assistance
- General progress and arrangements:
  - Multisector statistics mission (February 1999) produced action plans and timetables across major statistical areas; follow-up missions undertaken.
  - Council of Statistics established; constitution and functions ratified.
  - Albania selected as a pilot country for the data dissemination module of the ROSC; ROSC published on the Fund’s website in May 2000.
  - Albania participates in the General Data Dissemination System (GDDS); complete GDDS metadata posted and regularly updated on the Fund’s Dissemination Standards Bulletin Board.
- A. Real sector — Price statistics and national accounts:
  - CPI:
    - CPI weights revision initiated in 2001 based on a new household budget survey; revised CPI finalized in February 2002.
    - Estimation of imputed rent within the CPI improved in 2003.
    - CPI data reported regularly for publication in IFS.
  - PPI:
    - STA missions (May 2000 and January 2002) assisted INSTAT; official monthly PPI published on a quarterly frequency since March 2002.
  - National accounts:
    - First official GDP estimates for 1996-2000 published January 2003; preliminary 2001 GDP published later in 2003.
    - Preliminary estimates for 2002 GDP and revised estimates for 2001 GDP published in September 2004.
    - Estimates still hampered by weaknesses in basic data sources and incomplete private sector coverage.
    - STA project financed by the Italian government: $500,000 committed from its sub account with the IMF over November 2003–November 2005 to improve national accounts and source data; Istat and Statistics Finland providing technical assistance.
    - STA mission (November 2004) assisted in improving timeliness; authorities agreed to approaches for early annual estimates and experimental quarterly estimates.
- External trade:
  - Data collection severely disrupted during the 1997 crisis; compilation and dissemination resumed after Kosovo-related delays.
  - Plans include forthcoming introduction of ASYCUDA with EU assistance.
- B. Government finance:
  - First fiscal data reported (1995) for publication in 1996 GFS Yearbook and IFS.
  - New quarterly bulletin of government statistics started March 1998.
  - Multisector mission (1999) assisted in upgrading to GFSM 1986 standards and developing regular reporting to the Fund.
  - Data for 1997, 1998, and 2002 reported for inclusion in the GFS Yearbook; Albania currently does not report data for inclusion in IFS.
  - Foreign debt database developed with UNCTAD nearly operational, requiring auditing for final implementation.
  - Further improvements urgently required on accuracy and timeliness of foreign-financed capital expenditure information.
- C. Monetary accounts:
  - Compilation framework conforms to the Monetary and Financial Statistics Manual; data compiled on a timely basis.
  - Parliament (2002) passed law authorizing BoA to request data from savings and credit associations (SCAs); about 130 SCAs report simplified forms to BoA.
  - New plan of accounts for commercial banks implemented; revised reporting forms used since June 1999.
  - Monetary accounts revised from February 2001 onward to record repurchase and reverse repurchase agreements; revised data first published in October 2002 IFS.
- D. Balance of payments:
  - BoA compiles BOP using BPM5 classification; quarterly data reported regularly to STA.
  - Measurement of tourism services improved via traveler surveys; further refinements needed.
  - Remaining problems: service transactions, remittances, monitoring financial account transactions, foreign assistance, and external debt—need stronger data sources and improved estimation methods.
  - November 2004 mission recommended strengthening legal framework and using bank reporting to verify enterprise survey data; incorporate direct investment survey results and investigate net errors and omissions at reporting bank level.
  - Authorities have not initiated compiling foreign currency liquidity data in line with the Data Template on International Reserves and Foreign Currency Liquidity; official reserve assets definition in principle consistent, but other foreign currency assets and currency drains not included.
- E. External debt statistics:
  - External debt statistics for government and government-guaranteed debt compiled by the Ministry of Finance; data generally good.
  - MoF external debt database developed with UNCTAD became fully operational in mid-2000, ensuring timely and accurate reporting of external government debt (including commitments of state-owned enterprises).
  - Coverage could be improved; irregularities noted in presentation/recording of old external arrears.
  - External Debt Committee needs to improve coordination for timely and accurate reporting of external arrears and changes from rescheduling.
  - Authorities made limited attempts to collect private sector external debt data, limited to foreign direct investment enterprises.

### Core statistical indicators (selected operational details)
- Data reporting and update sources (as of January 26, 2005) — selected items and sources preserved as stated:
  - Exchange Rates: Date of latest observation Jan 14; Source of update BoA; Mode of reporting Fax; Confidentiality UR.
  - International Reserves: Date of latest observation Jan 13; Source of update BoA; Mode of reporting Fax; Confidentiality UR.
  - Central Bank Balance Sheet: Date of latest observation November; Frequency Monthly; Source of update BoA; Mode of reporting E-mail; Confidentiality UR.
  - Reserve/Base Money/Broad Money/Interest Rates/Consumer Price Index: various frequencies and BoA/INSTAT as primary sources; Confidentiality UR.
- Abbreviations: BoA: Bank of Albania; MoF: Ministry of Finance; INSTAT: Statistical Agency of the Republic of Albania; UR: Unrestricted use.

### Debt sustainability analysis: external debt (Appendix IV)
- Recent trends and baseline outlook:
  - External debt sustainability strengthened significantly over the past ten years due to rapid growth, cautious public indebtedness policies, and debt restructuring.
  - Continuous decrease in debt-to-GDP and debt-to-exports ratios (both NPV and nominal terms).
  - Over the medium term, external indebtedness projected to decline as a share of GDP; projected total debt service-to-exports ratio expected to remain at manageable levels, between 5 and 7 percent.
- Risks and sensitivity:
  - Outcome fairly robust to several stress scenarios but sensitive to an adverse export shock (one historical standard deviation) at the beginning of the projection period.
  - High historical volatility of export growth: standard deviation during 1996–2003 was 39.5 percentage points compared to the average growth of 23.3 percent.
  - Stress test: a one standard deviation decline in real growth in 2005 and 2006 (historical growth rate standard deviation 6.4 percent) and assuming no fiscal response implies a 17 percentage points of GDP increase in the NPV of debt stock relative to the baseline.
  - Other stress tests/alternative scenarios do not raise NPV of debt stock by more than 5 percent of GDP over the five-year projection period, implying end-2009 debt stock about or below its 2003 level.
- Historical and projection highlights (selected figures preserved from narrative and tables):
  - Ratio of total public debt to GDP: projected to be 55 percent at end-2004 compared with 72 percent in 2000.
  - Projection assumptions include a gradual switch to less concessional credit sources in the baseline.
  - Key macroeconomic assumptions (examples listed exactly as in source):
    - Real GDP growth (in percent) baseline projections: 6.0 (2004–08 average), 6.0 (2009–23 average); historical averages and standard deviations presented in tables.
    - GDP deflator in US dollar terms (change in percent): sample values include 12.1, 1.8, -18.7, 10.2, 14.4, 0.0, 3.7, 6.1, 20.1, 24.0, 11.9, 2.8, 2.9, 2.8, 3.5, 1.9, 1.9, 1.9, 1.9, 1.9.
    - Effective interest rate (percent) series includes values such as 0.7, 1.6, 1.5, 1.7, 1.3, 1.1, 1.2, 1.7, 1.6, 1.9, 2.7, 3.2, 4.1, 4.1, 3.6, 3.6, 3.7, 3.8, 3.7, 4.0.
    - Growth of exports of G&S (US dollar terms, in percent): historical series includes 15.5, -30.4, 15.9, 110.9, 18.8, 19.0, 9.0, 27.5, 39.6, 25.2, 18.0, 16.9, 16.8, 9.4, 9.4, 8.9, 11.6, 9.9, 9.9.
    - Grant element of new public sector borrowing (in percent) sample projections include 30.0, 32.5, 22.3, 18.1, 17.7, 16.8, 16.3, 16.2, 17.5, 16.9, 16.0.
  - Nominal GDP (billions of US dollars) projections: 2.7 (1995), 3.0 (1996), 2.2 (1997), 2.7 (1998), 3.4 (1999), 3.7 (2000), 4.1 (2001), 4.5 (2002), 5.7 (2003), 7.5 (2004), 8.9 (2005), 9.7 (2006), 11.4 (2008), 12.4 (2009), 12.9 (2010), 15.5 (2011), 16.8 (2012), 21.1 (2015), 26.6 (2018), 39.1 (2023).
- Sensitivity analyses (selected outcomes preserved):
  - Baseline NPV of debt-to-GDP ratio trajectory (selected years): 16 (2003), 14 (2004), 14 (2005), 14 (2006), 13 (2007), 12 (2008), 12 (2009), 12 (2010), 11 (2011), 11 (2012), 11 (2013), 11 (2014), 10 (2016), 9 (2018), 8 (2020), 6 (2023).
  - Bound test B2 (Export value growth at historical average minus one standard deviation in 2004-05) produces sharp increases in NPV of debt-to-exports ratio (examples include 210, 427, 534 in early projection years in table rows).
  - Debt service-to-exports ratio under the baseline shown in tables with sample values such as 3.2, 7.5, 11.6, 9.1, 4.1, 4.0, 4.1, 6.8, 5.0, 4.6, 6.6, 7.7, 6.8, 6.4, 5.5, 5.5, 5.4, 5.1, 4.6, 3.7 across historical and projected years.

### Public sector debt sustainability (Appendix IV, Tables 2a–2b)
- Historical evolution and projections (selected exact figures from tables):
  - Public sector debt (percent of GDP): estimate series includes 75.6 (1997), 68.5 (1998), 66.7 (1999), 71.7 (2000), 66.8 (2001), 64.8 (2002), 60.7 (2003), 55.3 (2004), with projections showing 54.5, 54.1, 54.2, 53.3, 52.2 for 2005–2009 in table rows.
  - Foreign-currency denominated share examples: 38.1 (1997), 32.3 (1998), 29.3 (1999), 29.1 (2000), 25.8 (2001), 23.4 (2002), 20.3 (2003), 17.3 (2004).
  - NPV of public sector debt (selected): 58.6 (2003), 52.5 (2004), 51.7 (2005), 50.3 (2006), 49.7 (2007), 48.3 (2008), 47.3 (2009).
  - Debt service-to-revenue ratio (in percent) sample values: 33.8, 37.6, 30.1, 25.1, 18.9, 17.7, 19.3, 17.3, 16.8, 16.2, 15.3, 15.7, 15.6.
- Key macro-fiscal assumptions reproduced from source where presented:
  - Real GDP growth: -10.2 (1997), 12.7 (1998), 10.1 (1999), 7.3 (2000), 7.2 (2001), 3.4 (2002), 6.0 (2003), 6.4 (2004), 6.4 (2005), 5.9 (2006), 6.0 (2007–2009).
  - Average nominal interest rate on forex debt examples: 0.8, 0.7, 0.4, 1.7, 0.7, 1.5, 1.1, 0.9, 0.5, 1.5, 1.9, 2.4, 2.8, 3.3, 3.4, 2.5.
  - Average real interest rate on domestic currency debt: 10.8, 13.8, 18.0, 11.1, 7.1, 5.6, 6.5, 9.1, 5.5, 3.4, 5.3, 5.5, 6.2, 4.5, 4.5, 4.9.
  - Real exchange rate depreciation examples: 20.1, -15.5, -6.2, 3.1, -5.9, -4.2, -22.5, -3.8, 12.7, -16.0.
  - Inflation rate examples: 9.8, 13.6, 4.5, 4.3, 3.4, 3.5, 4.1, 10.4, 10.2, 6.0, 3.7, 3.0, 1.8, 3.4, 3.5, 3.6.
- Sensitivity analyses (Table 2b excerpts):
  - NPV of debt-to-GDP ratio baseline and alternative scenarios (selected):
    - Baseline: 59 (2003), 52 (2004), 52 (2005), 50 (2006), 50 (2007), 48 (2008), 47 (2009).
    - Alternative A1 (real GDP growth and primary balance at historical averages): 57, 52, 53, 53, 54, 54, 55.
  - NPV of debt-to-revenue ratio, debt service-to-revenue ratio, and corresponding alternative and bound tests presented in the source tables with exact percent values.

### Request and policy statements (Appendix V: letter and MEFP)
- Letter to IMF Managing Director (Tirana, February 3, 2005):
  - Statement: PRGF arrangement (approved June 2002) instrumental in promoting macroeconomic stability, economic growth, and improving governance.
  - All quantitative and structural performance criteria under the program have been observed.
  - Requests:
    - Completion of the fifth review and the financing assurances review under the arrangement.
    - A five-month extension of the program until November 2005 to allow the sixth program review and final disbursement within the program period.
  - Attached documents: supplementary MEFP and TMU describing the economic program; policies consistent with November 2001 NSSED and Annual Progress Reports of May 2003 and May 2004.
  - Commitment to consult with IMF before adopting further measures or revisions to MEFP policies; to consult with IMF occasionally after arrangement while Albania has outstanding financial obligations to IMF.
  - Consent to publication of the letter, MEFP, and accompanying Executive Board documents on the IMF website.
  - Signed by: Fatos Nano (Prime Minister), Arben Malaj (Minister of Finance), Ardian Fullani (Governor, Bank of Albania).
- Supplementary Memorandum on Economic and Financial Policies (MEFP):
  - The MEFP and TMU describe the economic program for the period ahead and are consistent with NSSED; details begin in Section I: BACKGROUND (content follows in source beyond provided excerpt).

*Prepared by World Bank staff; questions may be addressed to Ms. Alia Moubayed at (202) 473-0250 or Mr. Timothy Gilbo at (202) 458-2449. Source: _cr0589 - APPENDIX II (IMF staff document)._

### 1.      This memorandum reviews the implementation of the PRGF-supported

### _cr0589 - 1.      This memorandum reviews the implementation of the PRGF-supported

### Performance under the program — macroeconomic outturns and structural progress
- Output growth estimated at 6 percent in 2004, led by rising retail trade and other services, agricultural and electricity production.
- Price increases held to the lower end of the "2-4 percent" target range in the second half of 2004.
- Current account deficit in 2004 expected to be 7 percent of GDP (a full percentage point of GDP lower than projection at the last review).
- Bank of Albania policy rate reduced by 50 basis point in the second half of 2004; reserves accumulated an additional US$234 million in the second half of the year.
- Public debt reduced by 5½ percentage point of GDP in 2004, standing at 55½ percent of GDP at end-2004.
- Total revenue and grants outturn in 2004 was 1¾ percentage points of GDP below budget.
- Underperformance drivers: shortfalls in external grants, reduced central bank profit transfers, postponed privatization of ARMO, some development loan disbursements not materializing.
- Compensating fiscal actions: expenditure reductions of about 3 percentage points of GDP relative to budget (mainly capital budget, also personnel and interest), use of half of Savings Bank privatization proceeds to retire treasury bills (reducing domestic borrowing by 0.7 percentage point of GDP), and an underlying domestic borrowing requirement decline of 0.2 percentage point of GDP relative to 2003.
- Overall deficit about 1 percentage point of GDP below programmed level.
- Indicators of poverty and human development: some improvements in absolute poverty, real incomes, life expectancy, child mortality, maternal health, literacy, and gender equality; but service provision to vulnerable groups needs strengthening.
- Customs administration: ASYCUDA deployment reduced average customs clearance period from more than 5 days in 2003 to less than 2 days; seizure of smuggled goods and cases submitted to the public prosecutor increased by more than 500 percent.
- Banking sector: Savings Bank privatized; entire commercial banking system under private management; introduction of AIPS real-time gross settlement system and associated intra-day credit facility in 2004; met end-December 2004 structural performance criterion of paying 10,000 employees through the banking system.
- Energy sector (KESH Action Plan): electricity production increased, collection rates improved, technical losses reduced, resulting in a financial profit in 2004; subsidy for electricity imports eliminated in the 2005 budget; subsidy to low-income electricity consumers implemented via electricity bills.
- Statistical improvements: enacted new law on statistics, published national accounts for 2002, and revised previous-year estimates per STA TA plan.

### Policies and measures for January–December 2005 — overall strategy and macro outlook
- Continued commitment to growth and poverty-reduction strategy with macroeconomic stability as priority.
- Emphasis on attracting high quality domestic and foreign investment, improving investment climate, infrastructure, rule of law, institutions, governance, and anti-corruption efforts.
- Non-inflationary growth of 6 percent sustainable initially via domestic demand, then by productivity and export volume gains.
- Current account expected to improve slightly in 2005 driven by rising exports, with further improvements over the medium term.
- Expectation that public and private domestic savings will increasingly replace foreign savings to finance rising investment, facilitated by expanded financial intermediation.

### Fiscal policy — 2005 budget stance and fiscal reforms
- 2005 budget aims for further declines in public debt and the underlying domestic borrowing requirement through substantial savings in current spending.
- Current expenditure projected to decrease by 0.9 percentage points of GDP (mainly reduced subsidies, wage bill, and operational costs), while protecting social expenditures.
- Domestic borrowing requirement expected to be 2.7 percentage points of GDP in 2005, about 0.2 percentage points of GDP lower than domestic borrowing in 2004 before use of Savings Bank proceeds.
- Public debt stock projected to decline by 0.8 percentage points to 54.5 percent of GDP.
- Privatization receipts from Albtelekom and sale of remaining public stake in INSIG not included in the budget due to uncertainty; intended allocation of proceeds in equal parts to domestic debt redemption and investment in priority areas when realized.
- Capital expenditure to expand while current expenditure declines, allowing an increase in infrastructure and poverty-alleviating investment by about 0.7 percentage points of GDP relative to 2004.
- Commitment to avoid haphazard end-year expenditure cuts by basing budget on prudent revenue projections.

### Tax, customs, and revenue administration measures
- 2005 fiscal package measures:
  - Eliminated deduction of social insurance contributions from personal income tax base; reduced number of personal income tax brackets; subjected the first sale of residential buildings to VAT, effective 2006.
  - Reduced corporate income tax rate from 25 to 23 percent in 2005 and to 20 percent in 2006; projected 0.15 percent of GDP cost in 2005 offset through savings in other areas.
  - Introduced individual income tax returns and phased filing requirements for high noncompliance-risk groups.
  - Eliminated annual renewal requirement for small business registration with GDT.
- Customs administration actions:
  - Extend ASYCUDA to a total of 5 customs houses (PC; end-March 2005), representing more than 75 percent of all customs traffic.
  - Implement ASYCUDA risk assessment module in 5 customs houses, including Tirana and Durrës (PC; end-March 2005).
  - Develop and issue unified instructions to customs warehouses per EU CAM-A assessment.
- General Directorate of Taxes (GDT) measures:
  - Accrual of interest on tax refunds overdue more than 60 days.
  - Reduced carry forward period for VAT credit refunds from 6 to 3 months.
  - Rapid VAT refunds for low-risk exporters with ex post audits by risk assessment (PC; end-June 2005).
  - Clear overdue VAT refunds originated prior to June 2004, estimated at lek 700 million (included in 2005 budget VAT revenue projection).
  - Quarterly earmarking of an amount equal to 1 percent of the VAT collected during the previous quarter to pay overdue VAT refunds until the stock of arrears is eliminated (SB; ongoing).
  - Quarterly reporting on overdue VAT refunds and on current VAT refund requests, amounts requested, refunds paid, and refunds rejected (SB; ongoing).
  - Computerization: implement software modules for excises and national taxes in the second and third quarters of 2005 respectively; expect 15 branches to be fully computerized by end-2005 covering 80 percent of all taxpayers and 95 percent of tax collections.
  - FAD TA being received to update reform agenda and expand IT use.

### Budget process, expenditure control, and medium-term fiscal strategy
- Improvements in budget transparency: budgets accompanied by prioritized lists of investment programs and updated MTBP; published on official website prior to parliamentary debate.
- Reduced maximum allowable transfer between budget appropriations to 5 percent for 2005 fiscal year.
- Public sector wage policy for 2005: discontinue across-the-board increases; allocate wage bill increases to raise pay for education, health, other priority areas, skilled specialists, and to fund civil service reform (with World Bank assistance).
- Intend to formally repeal automatic price indexation of wages prior to presentation of the 2006 budget.
- Enhance expenditure control by extending treasury automation to regional branches and increasing use of the banking system in budgetary transactions.
- Medium-term objectives (2006–07): further reduce domestic borrowing to crowd in private sector credit and continue declining public debt trend; improve revenue mobilization and combat tax noncompliance.
- Revenue gains from tax administration improvements not included in 2005 budget projections but expected to materialize over the medium term.
- Plan to prepare for obtaining a sovereign credit rating to access international capital markets and facilitate international financing for domestic private firms.

### Monetary and financial sector policies
- Monetary policy aim: keep inflation within the "2–4 percent" BoA target band and maintain adequate reserves.
- Repo rate to remain main policy instrument.
- Expectations over program remainder:
  - Money demand broadly stable as a share of GDP.
  - Private sector credit to grow rapidly from its low base.
  - Share of currency in broad money to continue declining.
- Maintain flexible exchange rate regime; foreign exchange interventions used mainly to smooth short-term shocks and to maintain reserves broadly equivalent to 4 months of imports of goods and services.

*Source: IMF staff memorandum reviewing implementation of the PRGF-supported program and policies for 2004–07 (text as provided).*

### 16.      We will continue reforms aimed at improving the efficiency, transparency, and

### _cr0589 - 16.      We will continue reforms aimed at improving the efficiency, transparency, and

### Banking sector reforms and financial intermediation
- Continue reforms to improve the efficiency, transparency, and volume of banking sector intermediation and financial services.
- Use the upcoming FSAP exercise to evaluate progress and refine the reform agenda.
- Measures to deepen intermediation and combat the informal economy:
  - Foster the use of the banking system in regular business conduct; promote payment of public sector salaries through the banking system as a catalyst.
  - Increase the total number of public employees paid through the banking system to 25,000 by end-March 2005 (PC) and to 50,000 by end-June 2005 (PC).
  - Implement an inter-bank bulk clearing system for small transactions in 2005 to facilitate automated bill payments, wage deposits, and other customer services (in consultation with industry).
- Market and legal infrastructure enhancements planned over 2005:
  - Consider options to increase the depth of the T-bill market, including extending participation to large nonfinancial firms and introducing market-making and brokerage arrangements.
  - Explore feasibility of developing additional financial markets, such as foreign currency swaps and collateralized inter-bank money markets.
  - Banking law (currently in drafting) to clarify rules and procedures for commercial banks, including powers of the supervisory authority concerning receivership and conservatorship, and to mandate greater transparency and consumer protection.
  - Electronic Record Law to establish evidential value of electronic signatures; a draft has been prepared by the BoA with World Bank assistance and passage is expected in 2005.

### Insurance sector reforms
- Recognize need for significant improvement in practices, standards, transparency, and supervisory effectiveness in the insurance sector.
- Secured resident advisors in the insurance regulatory agency and in INSIG.
- Will use the FSAP exercise to identify reform direction and will request additional TA as required to formulate a comprehensive restructuring plan.

### Monetary framework and central bank independence
- Remain committed to supporting the integrity of the monetary framework and the independence of the central bank (BoA).
- Ensure BoA retains policy and operational autonomy; take no legislative or regulatory action that weakens BoA’s full control over the bank’s budget, including staff compensation levels, currently exercised by the BoA’s Supervisory Board.
- Government will issue interest-bearing securities to the BoA to cover reserve valuation losses due to appreciation of the lek:
  - 2003 valuation losses amounting to Lek 7.7 billion have already been issued.
  - 2004 valuation losses—estimated at Lek 4 billion—will be issued in April 2005 following certification of the 2004 BoA audited accounts.
- Intend to eliminate the Treasury’s overdraft facility with BoA gradually as alternative commercial and market-based options develop and Treasury liquidity management improves.
  - Intend to reduce the statutory limit for the overdraft facility from 5 percent of budget revenues to 4.5 percent over the course of 2005 and then by a further 0.5 percent in each successive year.

### Structural policies, privatization, and sector restructuring
- Privatization agenda for 2005 includes Albtelekom and ARMO, as well as remaining minority stake in AMC and two commercial banks.
- Strive to privatize other publicly-owned companies such as SERVCOM and Albpetrol as rapidly as feasible.
- Preparations for Albtelekom sale:
  - Fully regularize the company’s outstanding financial obligations to private creditors.
  - Institute reforms to the rural and small operators regime along transparent lines and in accordance with international standards.
- Support restructuring of INSIG, currently being carried out with partial pre-privatization to EBRD and IFC, in preparation for eventual sale.
- Started a pilot project to restructure four water companies with World Bank and donor assistance; further actions needed to ensure sector viability.
- Electricity sector:
  - Fully implement 2005–07 action plan, with World Bank assistance, to modernize KESH and restructure the electricity sector.
  - Keep a stabilization fund with KESH’s profits in pluvial years to finance imports in less favorable years, with funds invested abroad, managed by a well-established international financial firm, and audited regularly.

### Governance, procurement, and investment facilitation
- Implement reforms to enhance governance, efficiency, and transparency:
  - Carry out independent feasibility studies for large projects funded by non-concessional borrowing (SB; ongoing) and subject them to open tenders except in exceptional circumstances (e.g., national security).
  - Continue to provide a quarterly listing and status report on all projects being considered for nonconcessional foreign financing (SB; ongoing).
  - Continue implementing action plan for removing barriers to investment; carry out a survey to assess impact and update the plan accordingly.
  - Implemented the law on asset declaration; plan to proceed with conflict of interest legislation.
  - Present an integrated planning system to the donor community to improve external assistance coordination and expect to implement an agreed methodology following a period of dialogue.

### External policy and arrears rescheduling
- Retain a liberal trade regime.
- Aim to conclude a Stabilization and Association Agreement with the EU and an eventual EU-Albania free trade agreement.
- Regional free trade agreements concluded with Bosnia-Herzegovina, Bulgaria, Croatia, Kosovo, FYR Macedonia, Moldova, Serbia and Montenegro, and Romania; all agreements ratified and trade volumes rising rapidly:
  - In the first half of 2004 the share of these countries in total trade rose from 2.6 to 8.3 percent.
- Progress in rescheduling arrears on inoperative payments agreements with official creditors in 2004; continue efforts in 2005:
  - Agreement with Hungary finalized and implemented in first half of 2004.
  - Balances due to the Czech and Slovak Republics, Poland, and Romania have been reconciled; in Romania’s case, terms of payment are already negotiated.
  - Expect to conclude agreements with these four countries in the first half of 2005.
  - Aim to conclude rescheduling with official creditors by end of the program and with private creditors by end-2006.

### Data and statistical improvements
- Improve quality and coverage of economic statistics in cooperation with STA and other TA partners.
- Building on the new statistical law, signed memoranda of understanding for data provision between INSTAT and other government institutions.
- Present to Parliament a 5-year statistical program (SB; March 2005).
- Improve scope and collection of data on FDI and remittances and accelerate production of national accounts:
  - Publish preliminary 2003 national accounts by March 2005 (SB).
  - Introduce a pilot project on preparation of quarterly GDP estimates by June 2005.
  - Plan to issue the 2004 national accounts, based on sampling techniques, by end-2005.

### Program monitoring and reviews
- Seventh disbursement under the PRGF-supported program will be based on:
  - End-March 2005 quantitative performance criteria (Table 1 and the TMU).
  - End–March and end-June 2005 structural performance criteria (Table 2).
  - Completion of the sixth review and the financing assurances review.
- The sixth review is expected to be completed no later than November 10, 2005.
- During the program period, Albania will not:
  - Impose or intensify restrictions on making payments and transfers for current international transactions.
  - Introduce multiple currency practices.
  - Conclude bilateral payments agreements inconsistent with Article VIII.
  - Impose or intensify import restrictions for balance of payments reasons.
- Provide a new progress report on the NSSED by April 2005, taking into account recommendations of the joint staff assessment of the 2004 progress report.

### Selected quantitative targets and test-dates (highlights from Tables)
- Salary payments through banking system:
  - 25,000 employees to be paid through the banking system by End-March 2005 (Performance Criterion).
  - 50,000 employees to be paid through the banking system by End-June 2005 (Performance Criterion).
- ASYCUDA deployment and risk assessment:
  - Deployment of the ASYCUDA system in 5 customs houses by End-March 2005.
  - Implement the risk assessment module of ASYCUDA in 5 customs houses to perform inspections by End-March 2005.
- VAT administration and refunds:
  - Implement a system of quick VAT refunds with audits carried out ex post based on risk assessment selection for qualified taxpayers by End-June 2005.
  - Clear overdue VAT refunds originated prior to June 2004 by allocating 1 percent of VAT gross revenue on a quarterly basis (Ongoing structural benchmark).
  - Prepare quarterly reports on VAT refunds requested, paid, and rejected (Ongoing structural benchmark).
- Statistical program and national accounts:
  - Presentation to Parliament of 5-year Statistical Program by End-March 2005 (Structural Benchmark).
  - Completion of preliminary 2003 national accounts by End-March 2005 (Structural Benchmark).
- Reporting on external arrears:
  - Prepare quarterly reports (within one month of end of each quarter) on the stock of external arrears (Ongoing structural benchmark).
- Quantitative table highlights (selected exact figures as presented):
  - Ceiling on net domestic credit to the government (in billions of lek) — sample entries: 20; 21; 21; 6; 6; 6; -5; 12; 1; 3; 11; 13; 16; 6; 12.
  - Ceiling on net domestic assets of the BOA (in billions of lek) — sample entries: -19; 6; 6; -24; -7; -7; -38; -5; -15; -17; 2; 3; 7; -13; -12.
  - Indicative total tax revenue targets, millions of Lek — sample entries: 36; 36; 36; 74; 76; 76; 116; 116; 116; 161; 199; 244.
  - Floor for net international reserves of the BOA (in millions of US dollars) — sample entries: 112; 21; 18; 104; 57; 57; 182; 71; 141; 212; 71; 62; 83; 240; 254.
  - Ceiling on contracting or guaranteeing of public and publicly-guaranteed non-concessional external debt (in millions of Euros) — sample entries: 19; 107; 107; 19; 120; 120; 46; 141; 141; 46; 155; 155; 171; 240; 280.
  - Nonaccumulation of new external payments arrears, excluding interest on pre-existing arrears — entries: 0 across listed periods (performance criterion).
- Table 2 test-dates and structural benchmarks summarized as Ongoing or tied to End-March 2005 / End-June 2005 deadlines as specified above.

*Source: _cr0589 - 16. We will continue reforms aimed at improving the efficiency, transparency, and (IMF document).*

### APPENDIX                                                                        V

### APPENDIX V — ATTACHMENT I

### A. Net Domestic Credit to the Central Government
- Breakdown of categories of net domestic credit to the central government is given in Attachment Table 1.
- Limits on the change in net domestic credit to the government will be cumulative from end-December 2004.

### B. Net Domestic Assets (NDA)
- NDA of the Bank of Albania defined as: reserve money (currency issue less lek notes and coins held by the Bank of Albania, plus commercial bank reserves held at the BoA) minus the net international reserves of the Bank of Albania (Section C).
- All foreign currency assets and liabilities valued in local currency for program monitoring purposes at an exchange rate at end-December 2003.
- Level of the NDA was Lek 72 billion as of end-December 2003.
- NDA limits will be cumulative changes from end-December 2003 and monitored from the accounts of the Bank of Albania.

### C. Net International Reserves (NIR)
- NIR defined as reserve assets minus reserve liabilities of the Bank of Albania.
- Reserve assets include: monetary gold, SDRs, Albania’s reserve position in the IMF, foreign currency cash, and deposits abroad — provided they are readily available claims on nonresidents denominated in foreign convertible currencies and held for balance of payments/intervention purposes.
- Excluded from reserve assets: assets pledged, collateralized, or otherwise encumbered; claims on residents; precious metals other than monetary gold; assets in nonconvertible currencies; illiquid assets; and claims on foreign exchange arising from derivatives in foreign currencies vis-à-vis domestic currency (such as futures, forwards, swaps, and options).
- Reserve liabilities defined as foreign exchange liabilities to residents and nonresidents of the Bank of Albania, irrespective of maturity. Included items: foreign currency reserves of commercial banks held at the Bank of Albania; all credit outstanding from the IMF; commitments to sell foreign exchange arising from derivatives (such as futures, forwards, swaps, and options); and all arrears on principal or interest payments to commercial banks, suppliers, or official export credit agencies.
- Excluded from reserve liabilities: the government’s foreign currency deposits at the Bank of Albania. (Footnote: exclusion justified by current procedures whereby the government's foreign currency receipts are deposited in a blocked account at the Bank of Albania and transferred to the government’s lek account before being spent; a change would require revisiting the NIR definition.)
- Reserve assets and reserve liabilities will both be expressed in U.S. dollars.
- For monitoring during this program:
  - Exchange rates of the SDR and non-dollar currencies will be kept at their end-December 2003 levels.
  - Holdings of monetary gold will be valued at SDR 280.6 per ounce.
  - Excluded from gross international reserves: holdings of nonconvertible currencies, claims on nonresident financial institutions denominated in nonconvertible currencies, and other claims not readily available.

### D. Adjusters for NCG, NDA, and NIR
- Privatization proceeds (received in foreign currency) assumed cumulative from January 1, 2004, to:
  - End-March 2005: Lek 15.9 billion, (US$138.5 million).
  - End-June 2005: Lek 16.0 billion, (US$138.5 million).
- NIR floor will be adjusted upward (downward) and the NDA ceiling adjusted downward (upward) by half of any excess (shortfall) in receipts of privatization proceeds in foreign currency from these assumed values.
- NCG ceiling will be adjusted downward (upward) by half the amount of any excess (shortfall) in receipt of total privatization proceeds from these assumed values.
- Foreign budgetary and/or balance of payments loan financing (excluding IMF financing, project and commodity loans, and macro-financial assistance from the EU) assumed cumulative from January 1, 2004, to:
  - End-March 2005: US$ 19.0 million.
  - End-June 2005: US$ 29.0 million.
- If total foreign loan financing exceeds this projection:
  - Ceilings on NCG to the government and NDA of the Bank of Albania will be adjusted downward.
  - Floor on NIR will be adjusted upward by the amount of the excess.
- NDA ceilings will also be adjusted to reflect the impact of any change in the required reserve ratio of commercial banks with the Bank of Albania.
- For the NCG adjuster, the lek equivalent of deviations from the programmed amounts in terms of dollars is converted at an exchange rate of Lek 106.5 per U.S. dollar.

### E. External Debt and Arrears
- Definition of “debt” (per Guidelines on Performance Criteria with Respect To Foreign Debt, Decision No. 12274–00/85, August 24, 2000):
  - A current, i.e., not contingent, liability created under a contractual arrangement through provision of value (assets or services) requiring obligor payments of assets or services at future date(s) to discharge principal and/or interest.
  - Forms: (i) loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements); (ii) suppliers’ credits; (iii) leases (debt equals present value at inception of all lease payments expected during agreement, excluding operation/repair/maintenance payments).
  - Arrears, penalties, and judicially awarded damages from failure to make payments under obligations that constitute debt are debt.
  - Failure to pay obligations not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.
- Limit on medium- and long-term external debt:
  - Applies to contracting or guaranteeing by the central government or the Bank of Albania of new nonconcessional external debt with original maturity > one year.
  - Sub-limits on external debt with original maturity > one year and up to and including five years.
  - Applies to debt as defined above and to commitments contracted or guaranteed for which value has not been received.
  - External debt considered contracted when loan agreement or guarantee is ratified by the Albanian parliament.
  - Excluded from limits: refinancing credits and rescheduling operations (including deferral of interest on commercial debt), credits extended by the IMF, and credits on concessional terms (grant element ≥ 35 percent).
  - Grant element calculated using OECD Commercial Interest Reference Rates (CIRRs): for maturities < 15 years, based on six-month averages of CIRRs; for maturities > 15 years, based on ten-year averages.
  - Debt within the limit valued in U.S. dollars at the exchange rate prevailing when contract or guarantee becomes effective.
- Limit on short-term external debt:
  - Applies continuously to stock of short-term external debt owed or guaranteed by the central government or the Bank of Albania with original maturity up to and including one year.
  - Excluded: rescheduling operations (including deferral of interest on commercial debt) and normal import-related credits.
  - Debt within the limit valued in U.S. dollars at the exchange rate prevailing when contract or guarantee becomes effective.
- Continuous performance criterion: non-accumulation of new external payments arrears on external debt contracted or guaranteed by the central government or the Bank of Albania.
  - External payment arrears defined as external debt service obligations (principal and interest) falling due after March 31, 2002 and not paid when due, per contractual agreements.
  - Exclusions from prohibition on new arrears: (i) arrears arising from interest on stock of arrears outstanding as of March 31, 2002; (ii) external arrears subject to debt rescheduling agreements or negotiations.
- Large projects financed by nonconcessional foreign borrowing defined as those involving total nonconcessional foreign borrowing in excess of US$25 million.

### F. Tax Revenues
- Collection of total tax revenue by the Tax and Customs Departments and social insurance contributions will be monitored on the basis of quarterly indicative floors.
- Indicative floors include all revenues collected by the GDT, GDC, and SSI (including revenues collected on behalf of local governments), but exclude revenues collected by local governments directly.

### G. Monitoring and Reporting Requirements
- Performance under the program will be monitored from information supplied monthly to the Fund by the Bank of Albania, the Ministry of Finance, the General Directorate of Taxation (GTD), the General Directorate of Customs (GDC), and the Ministry of Economy.
- Information to be supplied monthly (except where noted) and on a timely basis includes:

  The Bank of Albania will supply to the Fund:
  - (i) The balance sheets of the Bank of Albania;
  - (ii) The consolidated accounts of the commercial banks and (separately) the SLIs;
  - (iii) The monetary survey;
  - (iv) Net domestic credit to the government (in the form outlined in Appendix Table 1);
  - (v) The net foreign assets of the Bank of Albania;
  - (vi) The foreign exchange cashflow of the Bank of Albania, including the level of NIR;
  - (vii) Daily average exchange rates;
  - (viii) Trade flows;
  - (ix) Periodic updates of balance of payments estimates.

*Source: APPENDIX V — ATTACHMENT I, _cr0589 - APPENDIX*

### APPENDIX                                                                        V

### _cr0589 - APPENDIX                                                                        V

### Reporting Requirements to the Fund
- Ministry of Finance will report:
  - (i) The summary fiscal table, including the overall budget deficit, on a cash basis;
  - (ii) Issuance of treasury bills by the MOF, including gross value and cash received;
  - (iii) Privatization receipts;
  - (iv) Information on the contracting and guaranteeing of new debt;
  - (v) Information on the stock of short-, medium- and long-term debt;
  - (vi) Information on all overdue payments on short-, medium- and long-term debt (with assistance from the Bank of Albania);
  - (vii) Information on the stock of VAT refunds claimed and refunds paid out every month.
- General Directorate of Customs will supply:
  - (i) Detailed monthly data on customs revenues collected;
  - (ii) Quarterly reports on corrective measures taken to deal with problems identified by the internal audit function.
- General Directorate of Taxation will supply:
  - (i) Detailed monthly data on tax revenues collected.
- Ministry of Economy will report quarterly or publish quarterly:
  - (i) All instances of nonpayment on the agreed memorandums of understanding for the repayment of the stock of end-December 2001 inter-enterprise arrears.
  - (ii) A description of remedial actions undertaken by the ministry in the event of non-payment on the agreed MOUs for the repayment of the stock of end-December 2001 inter-enterprise arrears.

### Albania: Calculation of Net Domestic Credit to Central Government (selected figures, In millions of lek)
- Treasury bills held outside central government:
  - Dec-03: 271,417
  - Sep-04: 277,272
- Treasury bills held by Bank of Albania (evaluated at issue price) (1):
  - Dec-03: 70,372
  - Sep-04: 62,935
- Treasury bills held by deposit money banks (1):
  - Dec-03: 84,203
  - Sep-04: 84,203 (table shows 184,203 in source; preserve exactly) 184,203 192,742 (source rows show multiple values; key rows preserved below)
- Treasury bills held by deposit money banks (source rows):
  - Dec-03: 184,203
  - Sep-04: 192,742
- Treasury bills held by other domestic lenders (excluding holdings of HHI and SSI):
  - Dec-03: 16,842
  - Sep-04: 21,594
  - Of which INSIG:
    - Dec-03: 1,548
    - Sep-04: 1,535
  - Of which Individuals and firms:
    - Dec-03: 15,294
    - Sep-04: 20,059
    - Of which BoA window:
      - Dec-03: 9,528
      - Sep-04: 12,510
- Other central government debt held outside central government (millions of lek):
  - Dec-03: 6,449
  - Sep-04: 10,974
  - Held by Bank of Albania (excludes accrued interest):
    - Dec-03: 1,449
    - Sep-04: 964
  - Held by deposit money banks (valued at face value):
    - Dec-03: 5,000
    - Sep-04: 10,010
- Equals gross domestic credit to government:
  - Dec-03: 277,866
  - Sep-04: 288,246
- Assets of central government (excluding HHI and SSI):
  - Dec-03: 7,534
  - Sep-04: 13,960
  - Deposits held at Bank of Albania:
    - Dec-03: 4,914
    - Sep-04: 11,541
    - In domestic currency:
      - Dec-03: 3,295
      - Sep-04: 2,962
      - Transferable deposits in lek:
        - Dec-03: 2,902
        - Sep-04: 2,481
      - Deposits in lek for projects:
        - Dec-03: 393
        - Sep-04: 481
    - In foreign currency at program exchange rates and program price of gold:
      - Dec-03: 1,619
      - Sep-04: 8,579
      - In foreign currency evaluated at current exchange rates:
        - Dec-03: 1,619
        - Sep-04: 8,067
        - Transferable deposits in foreign currency evaluated at program exchange rate:
          - Dec-03: 6,964
        - Transferable deposits in foreign currency evaluated at current exchange rate:
          - Dec-03: 6,547
    - Standard gold deposits of government evaluated at fixed exchange rate and gold price (Lek mns):
      - Dec-03: 1,619
      - Sep-04: 1,615
    - Standard gold deposits of government at current exchange rate and gold price (Lek mns.):
      - Dec-03: 1,619
      - Sep-04: 1,519
    - Number of ounces of gold equivalent:
      - Dec-03: 36,484
      - Sep-04: 36,408
  - Assets held at deposit money banks:
    - Dec-03: 2,621
    - Sep-04: 2,419
    - Deposits:
      - Dec-03: 1,757
      - Sep-04: 1,160
      - Deposits in domestic currency:
        - Dec-03: 912
        - Sep-04: 23
        - Transferable deposits in domestic currency:
          - Dec-03: 912
          - Sep-04: 23
      - Deposits in foreign currency evaluated at program exchange rates:
        - Dec-03: 1,666
        - Sep-04: 937
        - In foreign currency evaluated at current exchange rates:
          - Dec-03: 1,666
          - Sep-04: 881
          - Transferable deposits in foreign currency evaluated at current exchange rates:
            - Dec-03: 1,666
            - Sep-04: 881
    - Loans from government to DMBs:
      - Dec-03: 500
      - Sep-04: 402
    - DMB payables to government:
      - Dec-03: 364
      - Sep-04: 857
  - Held at savings and loan institutions:
    - Dec-03: 0
    - Sep-04: 0
- Deposits of HHI and SSI:
  - Dec-03: 2,230
  - Sep-04: 2,740
- Equals stock of Net domestic credit to central government (1+2-3-4):
  - Dec-03: 268,102
  - Sep-04: 271,546
  - Change since December 2003:
    - ...3,444
- Memorandum items:
  - Current exchange rate (Lek/SDR, eop):
    - Dec-03: 158.1104
    - Sep-04: 148.6618
  - Current exchange rate (Lek/US dollar, eop):
    - Dec-03: 106.4
    - Sep-04: 101.2
  - Program exchange rate (Lek/SDR, eop):
    - Dec-03: 158.1104
    - Sep-04: 158.1104
  - Program price of gold (price in SDRs dollars per ounce as at end-December 2003):
    - Dec-03: 280.6
    - Sep-04: 280.6
  - Market price of gold (price in US dollars per ounce):
    - Dec-03: 417.0
    - Sep-04: 412.4
  - Current exchange rate (US dollar per SDR, eop):
    - Dec-03: 1.4860
    - Sep-04: 1.4689

Notes (as presented):
- 1/ Evaluated at issue price.
- 2/ Evaluated at face value (data on treasury bill holdings of SLAs and other domestic lenders are currently available only at face value).
- 3/ Excludes accrued interest.
- 4/ Valued at face value (data on fixed and variable income securities held by DMBs are currently available only at face value).
- 5/ Includes accrued interest.
- 6/ Includes transferable deposits of government in domestic and foreign currency, lek deposits of central government for projects; and standard gold deposits of government (footnote # 8). Excludes all non-standard gold deposits; and excludes all nongold precious metal deposits of government; and excludes government deposits in foreign currency for projects.
- 7/ The reported lek value of foreign currency denominated assets of government will be converted to SDRs using the current end-of-period lek/SDR exchange rate; and then converted back to lek using the program Lek/SDR exchange rate of Lek 158.1104/SDR.
- 8/ Standard gold deposits are usable by government and therefore included in the definition of government assets. The lek value of standard gold deposits will be (a) converted to US dollars using the current end-of-period lek/US dollar exchange rate; (b) then converted to ounces of gold using the current market price of gold; then (c) converted to SDRs at the program price of gold of SDR280.6 per ounce; and then (d) converted to lek at the program Lek/SDR exchange rate of Lek 158.1104/SDR.
- 9/ Including account set up to hold the Savings Bank privatization revenue (Account No: 11.2.2.1.4)
- 10/ Includes all deposits of central government.
- 11/ The program Lek/SDR exchange rate is the value of this rate at end-December 2003 (Lek 158.1104/SDR).

### Press Release: IMF Executive Board Completes Fifth Review Under PRGF Arrangement with Albania (Press Release No. 05/48, February 28, 2005)
- Board completed the fifth review of Albania's performance under the PRGF and approved a request to extend the PRGF arrangement period from June 20, 2005 to November 20, 2005.
- Approved disbursement:
  - SDR 4 million (about US$6.1 million), bringing total disbursements under the arrangement to SDR 24 million (about US$36.6 million).
- Original three-year PRGF arrangement approved on June 21, 2002 for a total of SDR 28 million (about US$42.7 million).
- Ms. Anne O. Krueger (First Deputy Managing Director and Acting Chair) highlighted:
  - Growth has remained robust; inflation generally low; current account deficit has declined; the lek has strengthened.
  - Contributing factors: firm monetary policy stance, continued fiscal consolidation, privatization, progress in structural reforms.
  - Growth in 2005 and medium term expected to remain robust, supported increasingly by productivity and external trade gains.
  - Need for significant improvements in infrastructure and investment climate, including reforms to strengthen governance, property rights protection, and the rule of law.
  - Financial sector becoming increasingly dynamic since the privatization of the Savings Bank; Bank of Albania supporting development and stepping up prudential vigilance.
  - Program includes steps to expand financial infrastructure and curtail use of cash, including by paying public wages through the banking system.
  - A financial sector assessment is to be undertaken shortly.
  - Fiscal component consistent with the 2005 budget: envisages further fiscal consolidation, improvements in composition of budgetary spending, realistic revenue assumptions, and a surplus in the current balance to free resources for public investment.
  - Reduction in the underlying domestic borrowing requirement aims to allow expansion of credit to the private sector without triggering inflation and to maintain public debt on a downward trend.
  - Program envisages progress in structural reforms to strengthen fiscal institutions, improve governance, advance privatization, and improve the business climate.
- PRGF terms:
  - Annual interest rate: 0.5 percent.
  - Repayment: repayable over 10 years with a 5½-year grace period on principal payments.

### Statement by Pier Carlo Padoan and Carlo Gola (February 28, 2005) — Key Messages
- Introduction:
  - Authorities appreciate collaboration with IMF staff; program is coming to a conclusion.
- Performance highlights and key numbers:
  - Since 1997 economic growth averaged 7.5 percent annually for 1998–2004.
  - Per capita GDP increased almost three times between 1998 and 2004.
  - GDP growth in 2004 reached 6 percent.
  - Public debt declined from 84.6 to 55.7 percent of GDP between 1997 and 2004.
  - External debt reduced from 40.8 percent to 19.7 percent of GDP between 1997 and 2004.
  - In 2004, the current balance balanced for the first time since the transition.
  - Capital expenditures at end-2004: 4.62 percent of GDP.
  - Inflation since 2001 within Bank of Albania limits of 2-4 percent; average inflation in 2004: 2.9 percent; end-2004: 2.2 percent.
- Policy actions and reforms:
  - Authorities adopted a strong 2005 budget committed to reducing public debt, domestic borrowing and current expenditure despite mid-2005 election pressures.
  - Customs administration improvements: ASYCUDA operating in 5 customs houses and to be installed in a sixth by end of March, covering more than 80 percent of customs transactions.
  - Extension of Civil Service law to support customs and tax administration officials.
  - Tender to equip two sensitive customs houses with scanner systems is under preparation.
  - Authorities applied for a Prime Advisor for Tax administration (hoping support from the MCA program).
  - Privatization of the Savings Bank has made the financial sector more dynamic.
  - Bank of Albania working with IMF and World Bank team to conduct a FSAP.
- Remaining challenges:
  - Need to improve fiscal structure and discipline.
  - Reduce sizeable informal economy.
  - Enhance tax administration and expenditure management.
  - Significant investment needed for infrastructure to exploit geographic position in regional networks.
  - Enforce rule of law and improve governance to raise business climate indicators to regional levels.
  - Address poverty and regional disparities; align National Strategy for Socio-Economic Development priorities with the Medium-Term Budget Program.
- Closing:
  - Authorities committed to continuing implementation of important policies and structural reforms, including public administration reform, institution consolidation, fighting corruption, enhancing accountability, and improving governance.
  - The program has been an effective mechanism to support consolidation of critical economic reforms.

*IMF content unit: _cr0589 - APPENDIX V*

### 4.  Future engagement with the Fund.

### 4.  Future engagement with the Fund

### Authorities' view on Fund engagement
- Albania is "still some distance away from graduating from Fund involvement."
- Despite improved macroeconomic conditions, "the country has not yet fully developed its policy implementation capabilities."
- Authorities see Fund assistance and advice as playing "a key role in the design and implementation of macroeconomic policies and reforms focusing on the budget and treasury management and the banking sectors."
- Authorities propose elaborating an exit strategy that is "sound, credible, and that demonstrates that policy decision and implementation capacities have been significantly strengthened over the recent past, also thanks to Fund support."
- Enhancing ownership of the reform process is "key for a timely and successful exit strategy."
- Authorities believe Albania would benefit from "another mid-term program with the Fund, the typology of which will be discussed in due course."

### Executive Board assessment and guidance
- Directors commended Albania’s recent macroeconomic performance: strong growth, low inflation, and a narrowed current account deficit.
- Directors cautioned that a self-sustained broad-based expansion of net exports has not yet taken root and that the external balance remains dependent on migrant remittances and other transfers.
- Directors expected growth to continue "at a brisk pace in 2005 and over the medium term," conditional on improvements in governance, the investment climate, and acceleration of reforms (including property rights protection and law enforcement).
- Directors emphasized the need for a sound exit strategy and sustained political commitment to reform if a follow-up arrangement is to be considered.
- Directors welcomed the Ex Post Assessment conclusion that the Fund needs to remain engaged with Albania to build capacity in macroeconomic management, catalyze donor assistance, and mobilize domestic support for reforms.

### Monetary policy, financial sector, and central bank framework
- The Bank of Albania adopted a tight monetary policy stance since early 2002, which "prevailed on inflation and buttressed confidence in the lek."
- With inflation within the Bank of Albania’s target range, Directors considered the gradual easing of the monetary policy stance since 2002 "appropriate," noting the current neutral bias.
- Directors emphasized that the Bank of Albania should avoid having any explicit or implicit exchange rate target in foreign exchange interventions, keeping monetary policy focused on price stability.
- The successful privatization of the Savings Bank "revamped banking activity," supported by the Bank of Albania’s provision of financial market infrastructure.
- Directors encouraged developing the treasury bill, foreign exchange, and interbank money markets and urged prudential vigilance given rising private credit and dollarization.
- Directors looked forward to the findings and recommendations of the upcoming Financial Sector Assessment Program.

### Fiscal performance, institutions, and public finance reforms
- Public finances "have strengthened over the past few years but fiscal institutional reforms have lagged behind."
- Budget and expenditure management were hindered by over-optimistic revenue projections, leading to haphazard spending cuts when projections failed.
- In 2004, after revised revenue and expenditure projections, "domestic revenue has broadly met forecasts and budget implementation has improved."
- Shortfalls in external project-related financing and grants led to spending reductions and an overall deficit overperformance of "1¼ percentage points of GDP relative to program."
- The current budget in 2004 was "broadly balanced for the first time since transition."
- The enacted 2005 budget "embodies further fiscal consolidation and savings on current spending—premised on a much improved revenue projection."
- Directors welcomed the 2005 budget’s aim at further debt retrenchment and the authorities’ intention to use future large privatization proceeds solely for debt reduction and investment.
- Directors supported curtailing current spending to match realistic recurrent revenue projections and welcomed the authorities’ commitment to refrain from across-the-board public wage increases and to formally repeal wage indexation before the 2006 budget.
- Priority reforms recommended: accelerate reform of fiscal institutions, build capacity in expenditure management, strengthen the budget process and expenditure and debt management, reform tax administration to boost tax compliance and mobilize revenue, and reduce the size of the informal economy.
- A few Directors recommended reforming the tax system to give more weight to income taxes.

### Structural reforms, privatization, and social issues
- Some structural reforms gained momentum in 2004, notably privatization and sectoral restructuring.
- The authorities initiated privatization of INSIG (insurance), Albtelecom (fixed-line telecom) and ARMO (refinery), and are restructuring the electricity sector.
- Directors urged intensification of structural and institutional reform, improved infrastructure provision, measures to improve the investment climate, and a stepped-up fight against corruption.
- While indicators of absolute poverty improved owing to income growth, Directors recommended strengthening the safety net and targeting of social programs.

### Statistics and technical assistance
- Directors stressed the need to improve the quality and timeliness of Albania’s statistics.
- Directors welcomed technical assistance provided by the Fund and other donors and encouraged continued efforts in statistic improvement.

### Selected economic indicators (as presented)
- Real GDP: 7.3 (2000), 7.2 (2001), 3.4 (2002), 6.0 (2003), 5.9 (2004), 6.0 (2005 Proj.)
- Retail prices (avg): 0.0 (2000), 3.1 (2001), 5.2 (2002), 2.4 (2003), 2.9 (2004), 2.4 (2005 Proj.)
- Retail prices (end-period): 4.2 (2000), 3.5 (2001), 1.7 (2002), 3.3 (2003), 2.2 (2004), 2.7 (2005 Proj.)

Fiscal sector (in percent of GDP)
- Revenues: 23.8 (2000), 23.6 (2001), 24.5 (2002), 24.0 (2003), 23.7 (2004), 24.1 (2005 Proj.)
- Expenditures: 31.9 (2000), 31.6 (2001), 31.0 (2002), 28.5 (2003), 28.5 (2004), 29.0 (2005 Proj.)
- Overall balance: -8.2 (2000), -7.9 (2001), -6.6 (2002), -4.4 (2003), -4.9 (2004), -4.9 (2005 Proj.)
- Net domestic borrowing: 3.2 (2000), 3.1 (2001), 3.2 (2002), 2.9 (2003), 2.0 (2004), 2.7 (2005 Proj.)
- Public Debt: 71.3 (2000), 66.8 (2001), 64.8 (2002), 60.7 (2003), 55.3 (2004), 54.5 (2005 Proj.)
  - Domestic: 41.9 (2000), 41.0 (2001), 41.4 (2002), 40.4 (2003), 38.0 (2004), 37.3 (2005 Proj.)
  - External: 29.4 (2000), 25.8 (2001), 23.4 (2002), 20.3 (2003), 17.3 (2004), 17.1 (2005 Proj.)

Monetary indicators
- Broad money growth (in percent): 12.0 (2000), 20.2 (2001), 5.7 (2002), 8.7 (2003), 12.6 (2004), 9.3 (2005 Proj.)
- Interest rate (3-month T- bills, end period): 7.8 (2000), 8.0 (2001), 11.2 (2002), 7.3 (2003), 6.1 (2004), ...

External sector (in millions of U.S. Dollars)
- Trade Balance (goods and services): -816 (2000), -951 (2001), -1,159 (2002), -1,419 (2003), -1,723 (2004), -1,974 (2005 Proj.)
- Trade Balance (in percent of GDP): -22.1 (2000), -23.2 (2001), -25.8 (2002), -24.8 (2003), -22.9 (2004), -22.2 (2005 Proj.)
- Current account balance: -274 (2000), -263 (2001), -435 (2002), -469 (2003), -528 (2004), -625 (2005 Proj.)
- Current account balance (in percent of GDP): -7.4 (2000), -6.4 (2001), -9.7 (2002), -8.2 (2003), -7.0 (2004), -7.0 (2005 Proj.)
- Gross international reserves: 608 (2000), 737 (2001), 860 (2002), 1,026 (2003), 1,374 (2004), 1,459 (2005 Proj.)
- Reserves (in months of imports of goods and services): 4.1 (2000), 4.3 (2001), 4.0 (2002), 4.0 (2003), 4.1 (2004), 4.0 (2005 Proj.)

Memorandum items
- Nominal GDP (in billions of lek): 530.9 (2000), 588.7 (2001), 630.0 (2002), 695.1 (2003), 780.1 (2004), 857.3 (2005 Proj.)
- Nominal GDP (in billions of U.S. dollars): 3.7 (2000), 4.1 (2001), 4.5 (2002), 5.7 (2003), 7.5 (2004), 8.9 (2005 Proj.)

*Source: IMF staff report and Public Information Notice on the 2004 Article IV Consultation with Albania.*

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