## _cr0654 ## Source details **Canonical URL:** [_cr0654](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0654.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0654.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0654.pdf.json) --- ### Program objective and framework - Arrangement aim: prepare Albania for graduation from IMF-supported programs by promoting decisive reforms, reducing vulnerabilities, enhancing growth potential, strengthening government solvency, and protecting priority spending. - Authorities request a new three-year program supported by a PRGF-EFF blend arrangement with proposed access of SDR 17.045 million (35 percent of quota), equally distributed between the two facilities. - Program’s key reform areas: revenue administration, public debt management, financial market development, civil service, and expenditure management. - Completing a Stabilization and Association Agreement with the European Union identified as critical to provide external anchors to replace IMF-supported programs. ### Recent macroeconomic developments and outlook - Growth and external prospects affected by electricity supply disruptions and high oil prices. - Real GDP growth: - about 6 percent in 2004 - 5½ percent in 2005 - projected 5 percent in 2006 (compared with the 6 percent for both years projected in mid-2005) - Inflation outlook: - projected to remain at 3 percent (the midpoint of the BoA target band) - staff warned headline inflation might accelerate in 2006 if second-round effects occur - Current account: - estimated to widen from 5.5 percent of GDP in 2004 to 7 percent in 2005 - projected to deteriorate to 8 percent of GDP in 2006 due to higher electricity imports, then expected to improve as domestic production returns - Other indicators: - exchange rate stable - reserves, monetization, and private credit rising (private credit rising very rapidly from a low base) ### Fiscal policy and medium-term fiscal path - Fiscal framework designed to reduce domestic credit to government and public debt relative to GDP while protecting priority spending. - 2006 budget: - based on realistic revenue and privatization projections - utilizes large contingencies to protect priority expenditure - excludes possible gains from tax administration reforms; if realized, they will be allocated in a mid-2006 supplementary budget - Authorities reconfirmed commitment to use half of receipts from large privatizations to reduce public debt (MEFP ¶3, ¶7). - Key fiscal projections (percent of GDP): - Overall balance: 2004 -5.1; 2005 -3.8; 2006 -4.1; 2007 -3.5; 2008 -3.4; 2009 -3.2 - Domestic financing: 2004 4.2; 2005 3.1; 2006 3.0; 2007 2.8; 2008 2.6; 2009 2.5 - Privatization receipts: 2004 1.9; 2005 0.3; 2006 0.3; 2007 0.2; 2008 0.2; 2009 0.2 - Domestic net borrowing: 2004 2.3; 2005 2.8; 2006 2.6; 2007 2.5; 2008 2.4; 2009 2.3 - Foreign financing: 2004 1.0; 2005 0.7; 2006 1.1; 2007 0.7; 2008 0.7; 2009 0.7 - Current balance: 2004 -0.2; 2005 0.4; 2006 0.5; 2007 1.3; 2008 1.6; 2009 1.9 - Public debt: 2004 56.5; 2005 54.9; 2006 55.0; 2007 54.5; 2008 53.6; 2009 52.6 - Domestic: 2004 38.5; 2005 38.1; 2006 38.1; 2007 37.4; 2008 36.6; 2009 35.8 - External: 2004 18.0; 2005 16.8; 2006 17.0; 2007 17.0; 2008 17.0; 2009 16.8 - Debt service to revenue 2/: 2004 17.3; 2005 15.5; 2006 16.9; 2007 15.6; 2008 15.7; 2009 15.3 - 2006 budget contingencies: about 0.75 percent of GDP; release conditional on meeting end-June revenue targets and consultation with staff. ### Structural and institutional reform priorities - Tax administration: - comprehensive tax administration reforms pursued with IMF technical assistance - special emphasis on servicing large taxpayers and improving their tax compliance - target: raise share of total tax collected by the Large Taxpayer Office to over 50 percent by mid-2006 (SB) - Public debt management: - draw up detailed action plan after early-2006 IMF evaluation mission; objective to build a modern debt-management unit by end of program - strategy: introduce new debt instruments, modernize practices, expand risk management capacity, produce independent debt-sustainability reports by end of program - plan to initiate the process of obtaining a sovereign credit rating soon - Financial sector: - develop action plan to implement FSAP recommendations; selected items as conditionality at the first review - short-term measures: establish a credit information bureau under BoA leadership; streamline collateral execution; develop secondary markets and interbank markets; buttress AML/CFT framework - supervisory capacity: immediate need to improve insurance and private pension supervision; FSSA recommended merging nonbanking supervisions - Expenditure management and public investment: - create public investment program department within MoF; prepare/issue instructions for public investment proposals (SB; end-June 2006) - require independent feasibility studies for any large project financed by nonconcessional commercial borrowing (TMU: large project = > Euro 20 million) - Civil service and pensions: - complete census of all public sector employees by end-June 2006 (SB) - review pension system design based on World Bank Social Insurance Review ### Electricity sector shock, impacts, and measures - Shock: - widespread blackouts in autumn 2005 as hydropower generation reduced due to rapidly falling water reserves; KESH depleted water reserves by early-September - collection and distribution loss rates deteriorated in Q2 2005 - Recovery: - electricity supply improved markedly in December as imports resumed and domestic production increased; rationing may continue until spring - Impacts: - businesses used private generators at significantly higher cost, squeezing profit margins and pressuring consumer prices and the external current account - widened trade deficit in 2005 due to strong demand for fuel and high oil prices, combined with slowdown in textile exports - Program measures: - Power Sector Action Plan (PSAP) updated and endorsed; KESH to meet PSAP targets for collection rates and losses for Q1 2006 (structural PC) - government postponed electricity tariff adjustment until mid-2006; 2006 budget contains no provision for electricity import subsidies - contingency financing: government prepared to issue short-term loan guarantee or advance direct short-term loan using budgetary reserves and contingency funds amounting to 0.3 percent of GDP - accelerate investments in nonhydroelectric generation and transmission import capacity ### Monetary policy, financial markets, and risks - Monetary stance: - program described as "appropriately tight to maintain price stability while providing for an adequate increase in international reserves." - inflation at 3 percent (year-on-year) in November; BoA target band 3 percent +/- 1 percent. - BoA to stay vigilant for second-round effects, particularly a pickup in nominal wage demand. - Financial market pressures (post-election delay): - BoA missed end-September indicative targets on international reserves and net domestic assets; reduced FX purchases to avoid depreciation, cutting off main liquidity channel → declining demand for T-bills and sharply higher market interest rates - BoA responses: temporarily extended direct credit to government, injected liquidity, government drew down deposits; net domestic assets expanded rapidly; markets normalized in early September; reserve purchases increased and BoA began withdrawing liquidity in October - Private credit and banking: - private credit accelerated rapidly; private sector credit projected to reach about 14½ of GDP by end-2005 - international comparison (private credit percent of GDP, end-year examples): Albania: 2002 7.3; 2003 8.4; 2004 9.9 - risks: rapid private credit growth raises loan quality risk; mitigant: still high capitalization of banking system - Monetary instruments and options: - use of reserve requirements and, as last resort, direct credit control cannot be ruled out if rapid credit growth widens current account deficit - BoA retains option of preemptive rate hike and indicated swift action if second-round effects emerge - Exchange rate policy: - flexible exchange rate continued to serve Albania well; retained to absorb idiosyncratic shocks ### Debt sustainability and risks - External debt: - largely concessional and expected to stabilize at about 20 percent of GDP in medium term - net foreign debt remains negative in medium term, preserving strong net external position - small amount of non-concessional borrowing permitted: less than one percent of GDP under program to promote graduation - Public debt projections: - public debt estimated at 54.9 percent of GDP at end-2005 - projection: public debt to decline below 53 percent of GDP by 2009 - NPV of public sector debt projected to decline from 52.7 percent of GDP in 2005 to 50.9 percent in 2009 - Stress tests and vulnerabilities: - public debt relatively resilient; NPV debt-to-GDP remains below 60 percent under most tests - most sensitive to negative growth shocks: a one-standard-deviation real growth shortfall in 2005-06 would imply NPV debt-to-GDP of 66 percent in 2009 - external debt sensitive to adverse export shocks (bound test B2) - Baseline macro assumptions for DSA: - Average annual real GDP growth: 6 percent - Inflation: 3 percent - Export growth: 12 percent annually for rest of decade, 9 percent thereafter (in Euros) - Real effective exchange rate constant ### Program financing, conditionality, and phasing - Executive Board approved concurrent three-year PRGF and EFF arrangements totaling SDR 17.045 million (about US$24.7 million); SDR 8.5225 million available under each facility. - Immediate draw: equivalent of SDR 2.435 million available on approval. - Schedule of disbursements under combined PRGF/EFF (millions of SDRs — percent of quota): - February 2006: 2.435 — 55.0 — Board approval of PRGF arrangement - August 2006: 2.435 — 55.0 — Observance of end-March 2006 performance criteria and completion of first review - February 2007: 2.435 — 55.0 — Observance of end-September 2006 performance criteria and completion of second review - July 2007: 2.435 — 55.0 — Observance of end-March 2007 performance criteria and completion of third review - January 2008: 2.435 — 55.0 — Observance of end-September 2007 performance criteria and completion of fourth review - July 2008: 2.435 — 55.0 — Observance of end-March 2008 performance criteria and completion of fifth review - January 2009: 2.435 — 55.0 — Observance of end-September 2008 performance criteria and completion of sixth review - Total: 17.045 — 35.0 (In percent of quota) - Note: "Albania's quota is SDR 48.7 million." and "The proposed distribution for the PRGF/EFF is 50 percent each." - Performance criteria and structural benchmarks (selected): - Quantitative PCs: ceilings on net domestic credit to government; ceiling on net domestic assets of BoA; floor on net international reserves of BoA; limits on contracting/guaranteeing nonconcessional external debt with maturities >1 year. - Structural PCs and SBs include: deploy ASYCUDA in 10 customs houses and implement risk module in 10 houses by end-March 2006; KESH meeting PSAP collection/loss targets by end-March 2006; census of wage bill by end-June 2006; public investment program department established by end-June 2006; LTO share ≥ 50 percent by end-June 2006. - Test dates: first test date March 31, 2006; first review expected by August 1, 2006. - TMU adjusters and monitoring: - Privatization proceeds adjust NDA/NIR/NCG (explicit cumulative assumptions listed for end-March, end-June, end-September, end-December 2006) - Monitoring data providers specified: BoA, MoF, GTD, GDC, Ministry of Economy, INSTAT - Access restrictions: - Purchases barred if specified PCs not observed, KESH/ASYCUDA structural PCs not met by March 31, 2006, if arrears to private creditors remain, or if Albania imposes payment restrictions or other specified external policy deviations. ### Program safeguards, technical assistance, and implementation risks - Safeguards and TA: - Prior actions designed to reduce implementation risks; IMF and donors providing technical assistance (FAD-MFD debt-management TA, FSAP follow-up) - Plan to develop debt management action plan and tax administration reforms with IMF TA - Implementation risks: - Significant political and implementation risks acknowledged (tradition of confrontational politics; weak implementation capacity) - Staff encouraged forging political consensus and intensified outreach - Donors generally supportive; financing for 2006 fully identified (Table 12); financing gaps for 2007–08 mostly identified ### Staff appraisal — priorities and recommendations - Rationale: continued program-based Fund involvement warranted to promote reforms reducing vulnerabilities; PRGF-EFF blend considered appropriate. - Policy priorities: - implement revenue administration reforms to strengthen fiscal sustainability and improve business environment - use revenue gains to finance growth-enhancing public investment and tax reforms that promote job creation while pursuing deficit-reduction ambitions - mitigate risks from large short-term domestic public debt by strengthening debt management, broadening investor base, and lengthening maturities - in financial sector, create credit bureau and improve collateral execution to increase availability and lower cost of bank loans for small businesses - Assessment and recommendation: - "Overall, the proposed program is appropriately ambitious, and the authorities have demonstrated sufficient political commitment to reform implementation." - Staff recommended approval of authorities' request for three-year PRGF and EFF arrangements. - Proposed timing of next Article IV consultation: at time of first review, subject to decision on consultation cycles of July 15, 2002. *Source: Executive Summary and excerpts from IMF staff report _cr0654 (pages and attachments as provided in supplied content).* ### Executive Summary ...................................................................................................... ### _cr0654 - Executive Summary ### Program objective and framework - The arrangement aims to prepare Albania for graduation from IMF-supported programs by promoting decisive reforms, reducing vulnerabilities, enhancing growth potential, strengthening government solvency, and protecting priority spending. - The authorities request a new three-year program supported by a PRGF-EFF blend arrangement with proposed access of SDR 17.045 million (35 percent of quota), equally distributed between the two facilities. - The program’s key reform areas: revenue administration, public debt management, financial market development, civil service, and expenditure management. - Completing a Stabilization and Association Agreement with the European Union is identified as critical to provide external anchors to replace IMF-supported programs. ### Recent macroeconomic developments and outlook - Growth and external prospects have worsened because of disruptions to the electricity supply and high oil prices. - Real GDP growth: - about 6 percent in 2004 - 5½ percent in 2005 (decline from 2004) - projected 5 percent in 2006 (compared with the 6 percent for both years projected in mid-2005) - Inflation outlook: - projected to remain at 3 percent (the midpoint of the BoA target band), despite shocks - authorities must remain vigilant to any second-round effects - Current account: - estimated to widen from 5.5 percent of GDP in 2004 to 7 percent in 2005 - projected to deteriorate to 8 percent of GDP in 2006 due to higher electricity imports, but expected to improve in subsequent years as domestic production returns to normal - Other indicators: - exchange rate stable - reserves, monetization, and private credit are all rising (private credit rising very rapidly, albeit from a low base) ### Fiscal policy and budgetary stance - The fiscal framework is designed to reduce both domestic credit to government and public debt relative to GDP. - The 2006 budget: - is based on realistic revenue and privatization projections - utilizes large contingencies to further protect priority expenditure - excludes possible gains from tax administration reforms; if realized, they will be allocated in a mid-2006 supplementary budget ### Structural and institutional reform priorities - Tax administration: - comprehensive tax administration reforms will be pursued based on IMF technical assistance - special emphasis on servicing large taxpayers and improving their tax compliance - Debt management: - following an early 2006 IMF evaluation mission, a detailed action plan to improve debt management will be drawn up to guide reform over the program period - Financial sector: - authorities will develop an action plan to implement the FSAP recommendations, with selected items set as conditionality at the first review - previously-initiated reforms will be completed in the interim - Other measures: - civil service reform - improvements in the institutional framework for evaluating large projects - reform of the macro-critical electricity sector - improvements in statistics ### Recent political and implementation context - The July 2005 elections led to the first peaceful transfer of power in Albania; the new government’s program commits to rooting out corruption, improving the business environment, and reducing widespread poverty, indicating strong program ownership. - Transition costs and disruptions: - in the two months to release official election results, budget revenue collection efforts were relaxed and management of some state-owned companies deteriorated - a wave of replacement of managers in public institutions and state-owned companies weakened implementation capacity temporarily ### Electricity sector shock and risks - Electricity supply experienced widespread blackouts in the autumn as domestic hydropower generation was reduced due to rapidly falling water reserves. - KESH (state-owned electricity company) had largely depleted water reserves by early-September, in part because it could not secure necessary imports; collection and distribution loss rates deteriorated in the second quarter of 2005. - The electricity supply improved markedly in December as imports resumed after the new government simplified procurement rules, and domestic production increased; however, rationing may continue until spring when water levels rise. - Impact on businesses and external accounts: - businesses used private generators at significantly higher cost than tariffs, squeezing profit margins and creating pressures on consumer prices and the external current account - widened trade deficit in 2005 due to strong demand for fuel and high oil prices, combined with a slowdown in textile exports ### Poverty and structural constraints - Despite major improvements, poverty remains widespread and some social indicators have deteriorated (e.g., educational enrollment). - Fiscal system weaknesses (weak links between medium-term budget framework and annual budget, lack of strong contingencies, and until recently unrealistic revenue projections) contributed to a disconnect between the National Strategy for Socio-Economic Development (NSSED) and annual budgets, resulting in ad hoc cuts at year-end in public investment and other priority spending. - Business climate and governance: - Albania is close to regional averages on many business climate indicators but ranks at the bottom in the region on broader indicators such as rule of law and control of corruption - weak infrastructure, governance, and institutions continue to hinder private business development and FDI; lack of export-oriented investment limits export market share gains ### Program implementation and conditionality - The accompanying Letter of Intent and Memorandum of Economic and Financial Policies contain policy commitments to maintain macroeconomic stability and accelerate reforms. - Staff supports the request for a program and sets selected financial sector and structural items as conditionality (including FSAP implementation items at the first review). - A plan will be developed for debt management following an IMF evaluation mission, and tax administration reforms will be implemented with IMF technical assistance. *Source: Executive Summary (pages 4–9) of the IMF staff report in _cr0654 - Executive Summary.* ### 9. The delay in announcing the election results also put pressure on financial ### _cr0654 - 9. The delay in announcing the election results also put pressure on financial ### Financial market pressures and Bank of Albania (BoA) response - Delay in announcing election results put pressure on financial markets and contributed to the BoA’s missing the end-September indicative targets on international reserves and net domestic assets. - Political uncertainty, combined with narrowing spreads between domestic and foreign currency deposits, reduced demand for lek in the third quarter. - To avoid a sudden depreciation, the BoA purchased less than planned foreign exchange reserves during this period, effectively cutting off the main channel of liquidity supply—leading to: - declining demand for T-bills, - sharply increasing market interest rates. - BoA measures taken: - temporarily extending direct credit to government, - injecting liquidity into the system, - government drew down its deposits. - These actions led to a rapid expansion of the BoA’s net domestic assets. - Markets began to return to normal in early September. - With reserve purchases increasing, the BoA began withdrawing liquidity in October, but T-bill rates reverted to their previous levels only in November. ### Inflation, monetary stance, and exchange rate considerations - Inflation status: - At 3 percent (year-on-year) in November, inflation is at the midpoint of the BoA’s 3 percent +/- 1 percent target range. - Risks to inflation: - Potential second-round effects of the electricity shortage and high oil prices on consumer prices pose a challenge. - Staff warned that headline inflation might accelerate in 2006, particularly if cost pressures from electricity shortages and sustained high oil prices lead to second-round effects and no timely action is taken. - Monetary policy framework: - Relative stability of velocity and the money multiplier supports keeping the previous program’s quantitative PCs. - Quantitative targets are set to keep inflation in the BoA’s 3 percent +/- 1 percent target range. - Foreign exchange market interventions remain the major source of domestic liquidity to secure required international reserves and mitigate seasonal currency supply variation. - Instruments and policy options: - Private credit growth projected to slow somewhat in 2006, but policy rate currently has limited impact on private credit demand. - Use of additional instruments—including reserve requirements and, as a last resort, direct credit control—cannot be ruled out if rapid credit growth leads to a significant widening of the current account deficit. - BoA retains the option of a preemptive rate hike and indicated it would take swift action if there were indications of second-round effects, particularly a pickup in nominal wage demand. - Exchange rate policy: - Agreement that a flexible exchange rate continued to serve Albania well. - Exposure to potentially large idiosyncratic shocks argued for retaining exchange rate flexibility. - Staff noted export growth did not suggest a need for exchange rate realignment, but gradual market correction might occur if textile export slowdown proves lasting. ### Private credit, banking sector position, and risks - Broad money growth was faster than programmed, reflecting rapid growth of foreign exchange deposits (Table 6 referenced). - Private credit accelerated rapidly throughout the year, well above rates projected in the previous program. - Private sector credit projected to reach about 14½ of GDP by end-2005. - Private sector credit levels (international comparison, percent of GDP at end-year): - Albania: 2002 7.3; 2003 8.4; 2004 9.9 - Kosovo: 2003 9.6; 2004 14.9 - Romania: 2002 8.3; 2003 9.5; 2004 10.0 - FYR of Macedonia: 2002 17.7; 2003 19.6; 2004 23.6 - Slovak Republic: 2002 39.6; 2003 31.6; 2004 30.6 - Bulgaria: 2002 19.6; 2003 27.4; 2004 36.7 - Estonia: 2002 26.9; 2003 31.9; 2004 43.3 - Czech Republic: 2002 29.8; 2003 30.8; 2004 32.2 - Hungary: 2002 35.8; 2003 43.0; 2004 45.9 - Croatia: 2002 50.7; 2003 54.2; 2004 57.5 - Euro Area: 2002 108.8; 2003 112.0; 2004 114.8 - Risks and mitigants: - Rapid private credit growth entails inherent risk to loan quality. - Still high capitalization of the banking system mitigates this risk (Table 7 referenced). - Ample supply of foreign exchange deposits (due to remittances and possibly reduced foreign exchange cash holding by households) preserved the historically strong net foreign asset position of banks. ### Structural reforms, growth potential, and program focus - Staff estimates: without further structural reforms, potential growth rate likely to decline by about half a percentage point in the coming five years. - If Albania could close half of its gap vis-à-vis Croatia regarding the size of foreign trade relative to GDP (requiring an increase of 20 percentage points to reach 42 percent of GDP) and reach Croatia’s current level of institutional quality at the same pace as in the past five years, it could counterbalance this decline. - Based on this framework, staff considers structural measures of the proposed program could maintain growth in the medium term at about 6 percent. - Program focuses (MEFP ¶6): - promoting sound financial policies, - enhancing growth potential, - reducing vulnerabilities, - strengthening government solvency while increasing and protecting priority spending. - Key short-run measures and prior actions: - further deploying ASYCUDA (MEFP ¶16), - improving statistics (MEFP ¶24), - safeguarding efficient use of nonconcessional external loans (MEFP ¶17), - produced an action plan to implement recommendations of a recent FAD tax administration TA report (MEFP ¶15), - plan to formulate action plans based on the 2005 FSSA report (MEFP ¶10) and a joint FAD-MFD public debt-management TA mission scheduled for early 2006 (MEFP ¶18). - Structural conditionality coverage: - Focus on revenue administration, public debt management, public expenditure management, and the financial system. - A structural performance criterion (PC) related to implementation of the Power Sector Action Plan to mitigate fiscal risks from KESH’s 2005 performance. - Prior actions to jump-start tax administration reforms were set. ### Fiscal policy stance and medium-term fiscal path - Medium-term fiscal program aims to gradually reduce public debt relative to GDP (Tables 10a and 10b, MEFP ¶2). - Current balance and public debt projections and targets: - Current surplus projected to reach about 2 percent of GDP in 2009 (up from about ½ percent in 2005). - Authorities plan to allocate part of future revenue gains from tax administration reforms to further reducing public debt, growth-enhancing and poverty-reducing public expenditure, and tax reforms. - Authorities reconfirmed commitment to use half of receipts from large privatizations to reduce public debt (MEFP ¶3, ¶7). - 2006 budget specifics: - Net domestic borrowing will be reduced to 2.6 percent of GDP from an estimated 2.8 percent in 2005. - Total size of contingencies (allocated contingent expenditure, reserves and contingency funds) will be significantly larger than in the 2005 budget. - Revenue estimates are realistic and based on Albania’s track record, reflecting only identified tax policy measures. - Decision to submit a supplementary budget in second half of 2006 contingent on a minimum of six-month revenue performance and consultation with staff (MEFP ¶7). - Medium-term fiscal path table (percent of GDP): - Overall balance: 2004 -5.1; 2005 -3.8; 2006 -4.1; 2007 -3.5; 2008 -3.4; 2009 -3.2 - Domestic financing: 2004 4.2; 2005 3.1; 2006 3.0; 2007 2.8; 2008 2.6; 2009 2.5 - Privatization receipts: 2004 1.9; 2005 0.3; 2006 0.3; 2007 0.2; 2008 0.2; 2009 0.2 - Domestic net borrowing: 2004 2.3; 2005 2.8; 2006 2.6; 2007 2.5; 2008 2.4; 2009 2.3 - Foreign financing: 2004 1.0; 2005 0.7; 2006 1.1; 2007 0.7; 2008 0.7; 2009 0.7 - Current balance: 2004 -0.2; 2005 0.4; 2006 0.5; 2007 1.3; 2008 1.6; 2009 1.9 - Public debt: 2004 56.5; 2005 54.9; 2006 55.0; 2007 54.5; 2008 53.6; 2009 52.6 - Domestic: 2004 38.5; 2005 38.1; 2006 38.1; 2007 37.4; 2008 36.6; 2009 35.8 - External: 2004 18.0; 2005 16.8; 2006 17.0; 2007 17.0; 2008 17.0; 2009 16.8 - Debt service to revenue 2/: 2004 17.3; 2005 15.5; 2006 16.9; 2007 15.6; 2008 15.7; 2009 15.3 - Note: Almost none of the domestic debt has a maturity of more than one year. ### Risks and sensitivities - External debt is largely concessional and expected to stabilize at about 20 percent of GDP. - Net foreign debt remains negative in the medium term, preserving the country’s strong net external position. - A small amount of non-concessional borrowing, less than one percent of GDP, is permitted under the program to promote graduation from IMF programs. - Short-term domestic debt remains relatively large and leaves public finances vulnerable to sudden changes in market sentiment. - Public debt is most sensitive to a negative shock to growth; external debt is most sensitive to an adverse shock to exports. *Source: IMF staff report (excerpts provided in the supplied content).* ### 23. The authorities’ reform agenda focuses on mitigating fiscal vulnerabilities that ### _cr0654 - 23. The authorities’ reform agenda focuses on mitigating fiscal vulnerabilities that ### Reform agenda — objectives and main areas - Focus: mitigate fiscal vulnerabilities stemming from a relatively large public debt and raise the quality and efficiency of public expenditure (MEFP ¶14). - Main areas of reform: - strengthening revenue administration; - improving public debt management; - continuing the civil service reform; and - improving expenditure management, including preparing a public investment program. ### Tax administration reforms - Authorities committed to implementing ambitious tax administration reforms set out in their action plan (MEFP ¶15). - Prior action: made the LTO fully functional; modernization of the LTO is a top priority (improve business climate, promote FDI, enhance revenue collection). - Target: raise the share of total tax collected by the LTO to over 50 percent by mid-2006 (SB). - Compliance focus: improve compliance by large taxpayers, particularly regarding social security contributions. - Transparency measure: select a private company to conduct regular independent surveys among LTO and customs clients; results to be published in a timely fashion. ### Public debt management reforms - Objective: build, by the end of the program, a modern debt-management unit (MEFP ¶18). - Strategy elements agreed with staff: - introduce new debt instruments; - modernize debt-management practices; - significantly expand risk management capacity; - build capacity to independently produce debt-sustainability reports by the end of the program. - TA and timing: joint FAD-MFD TA mission to formulate reform strategy; authorities will formulate a detailed action plan based on TA recommendations by end-June 2006 (SB). - Market access: plan to initiate the process of obtaining a sovereign credit rating soon. ### Expenditure management and public investment - Aim: raise the quality of public expenditure and increase public investment and other priority spending (MEFP ¶17). - Basis for reform plans: findings of the ongoing public expenditure review conducted by the World Bank. - Cooperation: Staff will work closely with the World Bank to expedite the review, identify and prioritize reform measures, and assess budgetary and macroeconomic implications. - Immediate measures: - create a public investment program department within the MoF; - prepare and issue instructions for submitting public investment proposals (SB). ### Civil service reform and pensions - Civil service reform (supported by the World Bank since 2001) goals: - develop capacity to hire and retain skilled personnel; - increase accountability; - apply transparent procedures for promotions; - improve effectiveness of public administration and services (MEFP ¶17). - Milestone: complete a census of all public sector employees by end-June 2006 (SB). - Government review: ongoing review of government’s structure and functions to eliminate redundant units and likely reduce overall public administration costs. - Pensions: staff emphasized the need to review pension system design to strengthen long-term financial position based on World Bank’s ongoing Social Insurance Review (MEFP ¶10). ### Tax policy stance and staff recommendations - Context: new government program included large tax rate cuts; authorities expected supply-side effects and tax base broadening. - Staff view: - stressed cautious, comprehensive approach to tax reform; - noted 2004 FAD TA report found overall tax design basically sound and rates comparable regionally; - report recommended safeguarding main features of VAT system—most important, the "single rate"; - high social security contribution rate found to discourage legal employment. - Policy option: use part of permanent revenue gains from tax administration improvements, once entrenched, to narrow the tax wedge on labor to support job creation. - Decision point: authorities agreed to formulate, by mid-2006, in consultation with staff, a medium-term tax policy reform strategy incorporating this approach (MEFP ¶19). ### Financial system stability and development - FSSA conclusion: financial system generally sound; core legal and regulatory frameworks in place (IMF Country Report No. 05/274). - Risks and conditions: - banking system’s vulnerability to macroeconomic/financial shocks currently relatively low but will grow with credit expansion; - rising monetization and financial intermediation from low levels; key financial markets underdeveloped. - Reform guidance: - BoA and MoF formed a joint task force to develop an action plan by end-March 2006 (SB); - reforms to strengthen monetary policy management and financial market supervision; - develop secondary markets for government securities and interbank markets; - improve quality, breadth, and depth of financial intermediation, including credit unions; - buttress AML/CFT framework. - Supervisory capacity: immediate need to improve insurance and private pension supervisory capacities; requested TA (MEFP ¶10). FSSA recommended merging nonbanking supervisions; World Bank to send an expert to Tirana in January. - Short-term measures: - establish a credit information bureau under BoA leadership to increase credit availability for SMEs and improve credit-risk pricing; - streamline procedures for executing collateral; - retain T-bill window at BoA and encourage banks to offer clients direct access to government securities as fee-based service; - BoA to eliminate cash payment at its T-bill window as part of AML/CFT strengthening. - Privatization: authorities determined to divest remaining minority interests in commercial banks (recent sale of holding in the Italian-Albanian Bank) (MEFP ¶11). ### Other structural policies — energy, transport, telecommunications - Power sector: - updated Power Sector Action Plan (PSAP) endorsed by World Bank and donors; arrears by budgetary institutions cleared in 2005; - KESH to meet PSAP targets for collection rates and losses for the first quarter of 2006 (structural PC); - government measures to ensure budgetary institutions pay electricity bills regularly. - Tariff timing: government postponed upcoming electricity tariff adjustment until mid-2006; 2006 budget contains no provisions for electricity import subsidies. - Contingency financing for KESH: if needed, government prepared to issue a short-term loan guarantee or advance direct short-term loan using available budgetary reserves and contingency funds amounting to 0.3 percent of GDP. - Water tariffs: authorities will adjust water tariffs to improve regional water companies’ financial positions. - Investments: authorities will work with World Bank and donors to accelerate investments in electricity generation and transmission. - TDR and Albtelecom: - Tirana-Durres-Rinas railway (TDR) project cancelled; - investigation of Albtelecom privatization tender to be completed (MEFP ¶21); - privatization plan for 2006 includes sale of some 16 small and medium-sized companies. ### Arrears, WTO commitments, and statistics - Arrears with non-Paris Club creditors: - outstanding debit balances estimated at €70 million at end-2005 with Algeria, Cuba, Greece, Poland, Vietnam, and Serbia and Montenegro; - agreements reached in 2005 with Romania and the Czech and Slovak Republics for a total of €16.7 million; - reconciliation with Poland concluded and negotiations initiated for repayment terms. - Private creditors: progress in reconciling outstanding balances with German, Swiss, and Greek creditors; authorities proceeded in accordance with Fund policies on lending into arrears. - Expected clearance: - all arrears with official creditors expected cleared by mid-2007; - arrears with private creditors expected cleared by mid-2008. - WTO: implementation of Albania's WTO commitments to reduce tariff barriers progresses as scheduled. - Statistics: INSTAT published preliminary 2003 national accounts and finalizing flash estimates for 2004 and Q1 2005 using a new methodology to estimate informal economy contribution; mission urged submission to parliament of completed five-year statistical plan (MEFP ¶24). Staff called for strengthened labor market and wage statistics in cooperation with BoA. ### Program financing, monitoring, and risks - Financing: - program fully financed for 2006 (Table 12); financing gap expected closed by donor assistance and arrears rescheduling; - for 2007–08, most of gap financing has been identified. - Fund obligations: given relatively small external debt and sound record of servicing the Fund, Albania should be able to meet obligations under proposed access (Table 13); projected debt service to the Fund would remain minimal, peaking at 0.6 percent of exports. - Monitoring and conditionality: - program monitored by quantitative quarterly benchmarks and semiannual PC, including net international reserves and net domestic assets of the BoA, net domestic government borrowing, and nonconcessional external public debt; - first test date: March 31, 2006. - proposed structural PC and SBs focus on Fund-mandated areas critical for macroeconomic stability. - Risks and safeguards: - significant political and implementation risks acknowledged (tradition of confrontational politics; weak implementation capacity); - safeguards: prior actions selected to reduce risks; additional IMF TA planned (starting with FAD-MFD public debt-management TA mission in early 2006); donors generally supportive; - staff encouraged forging political consensus via broad consultative process and intensified outreach. ### Staff appraisal — achievements, vulnerabilities, and policy guidance - Achievements: decade of macroeconomic stability and poverty reduction; high average growth; price stability; controlled external balance; improved poverty indicators but mixed progress on MDGs. - Remaining constraints: - weak public and private institutions and corruption limit growth potential and increase volatility; - inadequate contract enforcement, weak property rights protection, poor infrastructure hinder private investment in tradable sectors; - weak revenue administration despite customs modernization threatens fiscal sustainability and limits capacity to finance priorities; - relatively large short-term domestic public debt and limited public debt-management capacities increase budget vulnerability to market sentiment; privatization of dominant retail bank left public debt-management shortfalls. - Rationale for Fund involvement: continued program-based involvement warranted to promote reforms that reduce vulnerabilities; arrangement supported by a blend of PRGF and EFF resources considered appropriate. - Policy priorities set out by staff: - implement revenue administration reforms to strengthen fiscal sustainability, improve business environment, and reduce corruption; - use revenue gains to finance growth-enhancing public investment and tax reforms that promote job creation and private investment while considering deficit reduction ambitions; - mitigate risks from large short-term domestic public debt by strengthening public debt management, broadening investor base, and lengthening debt maturity; - in financial sector, create a credit bureau and improve collateral execution to increase availability and lower cost of bank loans for small businesses. - Fiscal stance: program balances reducing public indebtedness with increasing growth-enhancing and poverty-reducing public expenditure; public debt-to-GDP is gradually being reduced and could fall further with additional privatizations; 2006 budget aligned with medium-term fiscal program and includes considerably strengthened contingencies to improve budget implementation and protect priority expenditure. *Source: _cr0654 - 23. The authorities’ reform agenda focuses on mitigating fiscal vulnerabilities that* ### 44. The monetary policy stance is appropriate, but the BoA should stay vigilant to ### The monetary policy stance is appropriate, but the BoA should stay vigilant to ward off potential second-round inflationary effects from high oil prices and the cost pressures created by electricity shortages ### Monetary policy stance and inflation risks - The monetary program is "appropriately tight to maintain price stability while providing for an adequate increase in international reserves." - Main risks to price stability: - Pressure on production costs stemming from electricity shortages. - High international oil prices. - Potential second-round inflationary effects, "particularly a pickup in nominal wage demand." - Policy recommendation: - The Bank of Albania (BoA) should "stay vigilant" and "carefully analyze trends in order to identify early signs of second-round effects." ### Energy sector risks and required actions - The energy sector "remains a major risk factor." - Specific concerns and recommendations: - "The significant deterioration in the financial performance of KESH needs to be reversed urgently." - "Renewed efforts are needed to complete its restructuring." - "The implementation of investments necessary to increase the domestic generation of nonhydroelectric power and import capacities needs to be accelerated." ### Program safeguards, implementation risks, and technical assistance - The program "includes sufficient safeguards to mitigate the significant implementation risks." - Progress to date: - Authorities' prior actions "have considerably reduced risks to macroeconomic stability and jump-started tax administration reforms." - Technical assistance by the IMF and donors "will support the authorities' actions in key reform areas." - Continuing requirements: - "Continuous efforts on the part of the authorities and staff will be required over the program period to manage the program implementation risks." - Authorities "have continued making good faith efforts to reach agreement with official and private creditors on the clearance of external arrears." ### Staff recommendation and consultation timing - Assessment: "Overall, the proposed program is appropriately ambitious, and the authorities have demonstrated sufficient political commitment to reform implementation." - Staff recommendation: "Approval of the authorities request for the use of Fund resources under the three-year PRGF and EFF arrangements." - Article IV consultation: "Staff proposes that the next Article IV consultation with Albania be held at the time of the first review, subject to the provisions of the decision on consultation cycles of July 15, 2002." ### Schedule of disbursements under PRGF/EFF (as presented) - February 2006: 2.435 (millions of SDRs) — 55.0 (In percent of quota) — Board approval of PRGF arrangement - August 2006: 2.435 — 55.0 — Observance of end-March 2006 performance criteria and completion of first review. - February 2007: 2.435 — 55.0 — Observance of end-September 2006 performance criteria and completion of second review. - July 2007: 2.435 — 55.0 — Observance of end-March 2007 performance criteria and completion of third review. - January 2008: 2.435 — 55.0 — Observance of end-September 2007 performance criteria and completion of fourth review. - July 2008: 2.435 — 55.0 — Observance of end-March 2008 performance criteria and completion of fifth review. - January 2009: 2.435 — 55.0 — Observance of end-September 2008 performance criteria and completion of sixth review. - Total: 17.045 (millions of SDRs) — 35.0 (In percent of quota) - Note: "Albania's quota is SDR 48.7 million." and "The proposed distribution for the PRGF/EFF is 50 percent each." ### Selected macroeconomic figures and projections (as presented) - Real GDP 2/: 7.0 2.9 5.7 5.9 5.9 6.0 5.5 5.0 6.0 6.0 6.0 - Retail prices (avg.): 3.1 5.2 2.4 2.9 2.9 2.2 2.5 3.0 3.0 3.0 3.0 - Retail prices (end-period): 3.5 1.7 3.3 2.2 2.2 2.5 3.0 3.0 3.0 3.0 3.0 - Foreign savings 4/: 2.8 7.2 5.5 4.5 3.8 5.7 5.5 6.7 5.9 5.7 5.8 - Domestic savings: 24.8 17.4 17.9 19.6 20.0 19.4 18.6 18.0 19.5 20.4 21.0 - Investment: 27.6 24.4 23.4 24.1 23.8 25.1 24.2 24.7 25.4 26.1 26.8 - Revenues and grants: 23.7 24.7 24.5 24.1 24.1 24.5 24.6 24.6 24.7 24.7 24.8 - Expenditures: 31.6 31.4 29.0 29.2 29.2 29.1 28.3 28.7 28.2 28.0 27.9 - Overall balance (including grants): -7.9 -6.6 -4.5 -5.1 -5.1 -4.6 -3.8 -4.1 -3.5 -3.4 -3.2 - Public Debt: 67.6 65.0 61.8 56.6 56.5 56.2 54.9 55.0 54.5 53.6 52.6 - Broad money growth: 20.2 5.7 8.7 13.5 13.5 11.0 13.9 12.0 12.0 12.7 12.8 - Private credit growth: 23.4 41.0 31.0 31.1 36.9 36.9 49.3 69.1 43.2 35.3 29.6 26.7 (sequence preserved as in source) - Trade balance (goods and services): -22.5 -25.9 -25.1 -21.8 -21.7 -22.9 -23.2 -23.5 -22.5 -21.8 -21.6 - Current account balance (excluding official transfers): -5.8 -10.0 -8.1 -6.1 -5.5 -7.3 -7.0 -8.1 -7.3 -6.9 -6.9 - Gross international reserves (in millions of Euros): 82684583410251025108911471225132914831650 - Gross international reserves (in months of imports of goods and services): 4.6 4.4 3.9 4.1 4.1 4.0 4.1 4.1 4.1 4.1 4.2 - Change in real effective exchange rate (e.o.p., in percent): 9/9.8 -10.9 1.2 5.1 5.1 ... -1.1 ... ... ... ... *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 48. Personal computers (per 1,000 people)...1.69.711.7...... ### _cr0654 - 48. Personal computers (per 1,000 people)...1.69.711.7...... ### Balance of Payments: Levels and Projections (In millions of Euros) - Current account (2006 Q1–2009 projection series as presented): -264 -468 -402 -331 -65 -112 -103 -192 -472 -584 -568 -583 -639 - Balance of goods and services (selected series and projections): -1,036 -1,214 -1,248 -1,307 -306 -387 -411 -448 -1,553 -1,699 -1,762 -1,851 -1,992 - Exports (total, quarterly and annual snapshots): 937 962 1,031 1,293 318 381 396 375 1,470 1,641 1,850 2,082 2,316 - Goods: 340 349 396 486 122 143 134 136 534 614 706 812 918 - Services: 597 613 635 808 197 237 262 240 936 1,027 1,143 1,269 1,398 - Imports (total): 1,973 2,176 2,279 2,600 624 768 807 823 3,022 3,340 3,611 3,933 4,307 - Goods: 1,476 1,555 1,572 1,752 398 507 516 609 2,030 2,275 2,452 2,657 2,883 - Services: 497 622 708 848 226 261 291 214 992 1,065 1,159 1,276 1,424 - Income balance and interest due (selected): Income balance 166 134 152 146 303 239 321 331 341 351 351 41; Interest due 162 221 1 18 4 7 5 10 274 858 687 6 (values reported as in source) - Private transfers (selected): 605 612 693 830 210 243 270 224 947 981 1,059 1,133 1,212 - Capital account (selected): 322 481 403 436 71 122 311 8140 559 561 063 1696 (values preserved as in source) - Medium- and long-term loans (net): 919 575 682 279 114 912 478 5542 (values preserved as in source) - New borrowing (selected): 99 123 101 100 2718 152 585 178 141 156 173 - Multilateral loans (selected): 618 475 721 713 112 060 140 105 105 107 - World Bank (selected): 385 236 377 765 264 533 333 3 - EBRD (selected): 281 313 342 513 352 625 25 - Errors and omissions (selected): 87 -162 673 715 222 064 575 180 87 - Net balance (selected): 145 -327 177 1325 -508 -467 931 291 144 - Change in net reserves (increase = -) (selected): -154 -30 -46 -1934 -10 -31 -8 -86 -116 -165 -178 - Change in gross reserves (increase = -) (selected): -149 -191 0 -1911 -11 -63 -13 -77 -105 -153 -167 ### Balance of Payments: Percent of GDP (2001–09 projections) - Current account (percent of GDP): -5.8 -10.0 -8.1 -5.5 -7.0 -8.1 -7.3 -6.9 -6.9 - Balance of goods and services (percent of GDP): -22.5 -25.9 -25.1 -21.7 -23.2 -23.5 -22.5 -21.8 -21.6 - Exports (percent of GDP, total and components): Exports 20.4 20.5 20.8 21.5 21.9 22.7 23.6 24.5 25.2 - Goods: 7.4 7.4 8.0 8.1 8.0 8.5 9.0 9.6 10.0 - Services: 13.0 13.1 12.8 13.4 14.0 14.2 14.6 14.9 15.2 - Imports (percent of GDP, total and components): Imports 42.9 46.3 45.9 43.2 45.1 46.2 46.2 46.3 46.8 - Goods: 32.1 33.1 31.6 29.1 30.3 31.5 31.3 31.3 31.3 - Services: 10.8 13.2 14.2 14.1 14.8 14.7 14.8 15.0 15.5 - Income balance (percent of GDP): 3.6 2.8 3.1 2.4 2.0 1.9 1.7 1.6 1.5 - Interest due (percent of GDP): 0.3 0.5 0.4 0.3 0.4 0.7 0.7 0.8 0.8 - Private transfers (percent of GDP): 13.2 13.0 14.0 13.8 14.1 13.6 13.5 13.3 13.2 - Capital account (percent of GDP): 7.0 10.2 8.1 7.2 6.0 8.2 7.8 7.4 7.6 - Official transfers (percent of GDP): 3.0 2.8 2.6 1.7 1.5 1.4 1.3 1.2 1.1 - Direct investment (percent of GDP): 5.0 3.0 3.2 4.6 2.9 3.2 3.1 3.3 3.4 - Errors and omissions (percent of GDP): 1.9 -0.3 0.5 1.2 0.9 0.8 0.7 0.9 0.9 - Change in net reserves (increase = -) (percent of GDP): -3.3 -0.6 -0.9 -3.2 -0.1 -1.2 -1.5 -1.9 -1.9 - Financing gap (percent of GDP, memorandum): 0.00 0.00 0.00 0.00 0.40 0.50 0.80 0.30 0.3 ### Monetary Aggregates and Markets (end-period; In billions of leks unless otherwise indicated) - Broad money (end-period series and projections): 408.1 443.5 503.2 516.9 537.8 561.9 573.4 585.4 601.5 628.4 642.2 719.1 810.0 913.4 - Currency outside banks (selected): 130.8 125.2 138.1 129.4 135.8 141.5 151.0 147.4 151.5 158.3 164.4 173.3 183.1 187.2 - Deposits (selected): 277.4 318.3 365.1 387.5 402.0 420.4 422.4 438.0 450.0 470.1 477.8 545.8 627.0 726.2 - Domestic currency deposits (selected): 190.8 226.1 255.2 266.2 271.3 271.9 273.9 283.3 290.3 296.5 304.2 347.9 404.3 482.9 - Foreign currency deposits (selected): 86.5 92.2 110.0 121.3 130.6 148.5 148.5 154.7 159.7 173.6 173.6 197.9 222.6 243.3 - Net foreign assets (selected): 164.4 161.8 188.8 197.3 199.2 213.8 205.1 202.5 196.0 212.1 206.6 206.7 212.1 217.8 - Bank of Albania (selected): 96.9 99.8 118.6 122.2 124.9 128.4 131.6 130.8 130.0 140.4 143.4 159.4 181.9 206.4 - Commercial Banks (selected): 67.5 62.0 70.2 75.1 74.4 85.3 73.5 71.7 66.0 71.7 63.1 47.3 30.2 11.4 - Net domestic assets (selected): 243.8 281.7 314.4 319.6 338.6 348.1 368.3 382.9 405.6 416.3 435.7 512.4 597.9 695.6 - Claims on government (net of deposits): 245.3 260.1 271.0 269.9 276.4 277.6 283.6 287.6 291.6 295.7 299.7 316.8 334.5 353.1 - BOA financing (selected): 71.0 64.6 57.2 56.7 56.0 63.2 62.2 64.5 71.2 74.8 61.8 58.7 52.6 38.2 - Claims on the private sector (selected): 39.9 52.3 71.6 81.5 97.8 108.1 121.1 132.0 150.9 157.9 173.5 234.6 304.2 385.2 - In Leks (selected): 9.2 10.6 15.6 18.1 24.3 27.6 30.1 33.7 42.4 42.5 49.5 73.0 103.3 147.1 - In foreign currency (selected): 30.7 41.7 56.0 63.4 73.6 80.5 91.0 98.4 108.5 115.4 123.9 161.6 200.9 238.1 - Memorandum items: - Reserve money (billions of Lek): 163.9 160.6 178.6 171.2 180.4 194.1 197.3 198.9 203.5 212.6 216.8 233.1 251.8 262.8 - M1 (billions of Lek): 145.9 142.0 170.1 167.5 173.5 208.9 211.7 206.6 212.3 221.8 225.9 241.6 260.1 275.1 - M2 (Billions of Lek): 321.6 351.3 393.3 395.6 407.1 413.4 424.9 430.7 441.8 454.7 468.6 521.2 587.4 670.1 - Annual broad money growth (percent): 5.7 8.7 13.5 14.8 18.8 16.3 13.9 14.4 14.2 12.2 12.0 12.0 12.7 12.8 - Annual growth in private sector credit (percent): 41.0 31.1 36.9 48.5 68.0 73.2 69.1 62.0 54.3 46.1 43.2 35.3 29.6 26.7 - Gross reserves (millions of euros): 845 834 1,025 1,024 1,071 1,114 1,147 1,138 1,129 1,211 1,225 1,329 1,483 1,650 - Gross reserves (millions of U.S. dollars): 860 1,026 1,374 1,351 1,303 1,342 1,390 1,380 1,370 1,470 1,486 1,617 1,809 2,016 - Gross reserves (months of imports of goods and services): 4.6 4.4 3.9 4.1 (series continues in source) - Velocity (annual GDP/BM): 1.5 1.5 1.5 1.6 1.5 1.5 1.5 1.5 1.4 1.4 1.4 1.4 1.3 1.3 ### Financial Soundness Indicators (Selected, Dec-2003 to Sep-2005) - Regulatory capital as a percent of risk-weighted assets 1/: 28.5 21.6 21.0 19.8 18.3 - Regulatory Tier 1 capital as a percent of risk-weighted assets 1/: 29.0 21.5 20.4 19.3 17.9 - Regulatory Tier 1 capital as a percent of total assets: 4.8 4.8 5.0 5.2 5.1 - Regulatory capital as a percent of total assets: 4.7 4.8 5.1 5.3 5.3 - Shareholders' equity as a percent of total assets: 5.9 6.1 5.8 6.4 6.6 - Nonperforming loans net of provisions as a percent of regulatory Tier 1 capital 2/: 4.8 4.8 4.5 3.0 4.1 - Return on equity (ROE) (annual basis): 19.5 21.1 22.1 24.3 24.5 - Liquid assets as a percent of total assets (Liquid-asset ratio): 73.6 71.1 70.3 67.1 65.3 - Return on assets (ROA) (annual basis): 1.2 1.3 1.3 1.5 1.5 - Interest margin to gross income: 89.6 80.3 83.2 80.5 82.0 - Noninterest expenses to gross income: 57.4 66.2 81.5 75.3 76.7 - Customer deposits as a percent of total (non-interbank) loans: 65 72.1 53 5 49 8.3 41 7.8 38 4.8 (values preserved as in source) - Foreign currency-denominated loans to total loans: 82.1 80.5 79.9 77.8 77.6 - Risk weighted assets as a percent of total assets: 16.7 22.2 24.4 26.8 28.7 - Total loans as a percent of total assets: 13.6 16.4 17.6 20.8 22.8 - Total loans as a percent of shareholders' equity: 231.2 270.3 302.6 326.5 348.7 ### Structural Policy Intentions (Second Half of 2005 under Previous PRGF Arrangement) — Test dates and Status as of January 9, 2006 - A. Key Policy Intentions - Deployment of the ASYCUDA system in 10 customs houses. Test date: End-December 2005. Status: Installed in 9 houses - Implement the risk assessment module of the ASYCUDA system in 6 customs houses to perform inspections. Test date: End-December 2005. Status: Installed in 2 houses - The salaries of 70,000 employees of budgetary institutions to be paid through the banking system. Test date: End-September 2005. Status: Met - B. Other - Establish and implement a set of clear and objective criteria for inclusion of taxpayers in the large taxpayers unit of the General Directorate for Taxes. Test date: End-September 2005. Status: Completed in November - Concentrate control of large taxpayers in the large taxpayers unit in Tirana. Test date: End-September 2005. Status: Met in November - Implement in the Durrës tax office a program for selecting taxpayers for 80 percent of all fiscal visits on the basis of an objective, computer-based risk ... Test date: End-September 2005. Status: Met in part - Prepare advance GDP estimates for the first quarter of 2005. Test date: End-September 2005. Status: Met - Complete the preliminary 2004 national accounts. Test date: End-December 2005. Status: Met 1/ - Complete and make operational the inter-bank bulk clearing system at the Bank of Albania. Test date: End-September 2005. Status: Met - Prepare quarterly reports (within one month of the end of each quarter) on the stock of external arrears. Test date: Ongoing. Status: Not met on time, but provided to the mission team - Clear overdue VAT refunds originated prior to June 2004 by allocating to this end 1 percent of VAT gross revenue on a quarterly basis. Test date: Ongoing. Status: Met - Prepare quarterly reports on the aggregate amounts of the VAT refunds requested, refunds paid and refunds rejected. Test date: Ongoing. Status: Met *Sources: World Bank and Fund staff estimates; Ministry of Finance; Bank of Albania; donors; and Fund staff estimates and projections.* ### 13. Safeguard the efficient use of nonconcessional foreign project loans through: ### 13. Safeguard the efficient use of nonconcessional foreign project loans through: ### Actions and implementation status - (i) Conducting an independent feasibility study for any large project (as defined in the TMU) financed through non-concessional commercial borrowing. - Status: OngoingOn track. No new large project since the 6th review. - (ii) Provide a quarterly listing and status report on all projects being considered for nonconcessional foreign financing. - Status: OngoingNot met on time, but provided to the mission team. - Additional note: - Preliminary estimates have been discussed with staff and further refinements are being made on staff's request. ### Key operational implication - Independent feasibility studies are required for any large project financed by non-concessional commercial borrowing (per TMU definition), and reporting on projects for such financing is to be provided on a quarterly basis; timely provision of the quarterly listing was not met on schedule but the information was provided to the mission team. *Source: _cr0654 - 13. Safeguard the efficient use of nonconcessional foreign project loans through:* ### 2. The World Bank’s Board will discuss a new Country Assistance Strategy (CAS) for ### 2. The World Bank’s Board will discuss a new Country Assistance Strategy (CAS) for ### Overview - The World Bank’s Board will discuss a new Country Assistance Strategy (CAS) for Albania for FY06-FY09 in January 2006. - The proposed CAS builds on the experience of the World Bank Group (WBG) since the early 1990s (through three CASs). - The CAS seeks to build on improved macro-economic management and progress in structural reforms since 2002, and aims to support Albania’s National Strategy for Social and Economic Development (NSSED) and the European Union (EU) Stabilization and Association process (SAP) with the ultimate objective of EU integration and the attainment of the Millennium Development Goals (MDGs). ### NSSED (National Strategy for Social and Economic Development) - NSSED was adopted in 2001. - NSSED is an inclusive medium-term national development strategy with three pillars: - (i) improving governance, - (ii) promoting private sector development, - (iii) fostering human resources development. - NSSED emphasizes that weak governance and institutions are at the root of Albania’s developmental problems, and that economic growth is the main instrument to reduce poverty, raise standards of living, and accelerate attainment of the MDGs. - NSSED contains improved poverty diagnostics and an ambitious plan for monitoring and evaluation. ### Bank Group Strategy (CAS 2006-2009) — Pillars and Expected Outcomes - Reflecting Government priorities, the CAS (2006-2009) program seeks to support: - strengthening governance, - sustaining a private sector-led growth, - improving service delivery. - The CAS introduces a ‘Governance Filter’ comprising four core principles to mainstream governance considerations into all Bank interventions. - The CAS is more selective and focused on two pillars: (I) Continued Economic Growth through Support to Private Sector Development - Expected outcomes include: - (a) macroeconomic stability; - (b) improved business climate through better quality of business regulations and improved public-private sector dialogue; - (c) improved public infrastructure; - (d) increased operational efficiency of financial institutions; - (e) improved functioning of the land market; - (f) improved corporate governance; - (g) increased transparency and efficiency in the management of public spending and stronger institutions for planning, tendering and providing infrastructure and services; - (h) better accountability in public administration; - (i) better management and planning for Albanian coastal resources. (II) Improving Public Service Delivery, particularly in the Social Sectors - Expected outcomes include: - (a) improved educational attainment and quality of basic education; - (b) improved efficiency and equity of health financing; - (c) better quality of health care; - (d) improved fiscal sustainability of the social insurance system and increased access to well-targeted, sustainable, and effective assistance; - (e) improved access to safe rural water supply and sanitation. ### Lending Program and Analytical Support - The CAS proposes a lending range of US$ 75 – US$ 196 million, with actual lending determined by the pace of reform in key sectors. - Financing: blend of IDA and IBRD resources, with gradual transition from IDA to IBRD beginning in FY06. - Up to 11 new IDA/IBRD lending operations are proposed in FY06-FY09, of which three would be a series of programmatic Development Policy Loan (DPL) building on the PRSC series in the previous CAS. - The CAS also employs a targeted program of WBG Analytical and Advisory Activities (AAA) support. ### Active Portfolio and Upcoming Operations - The active World Bank portfolio includes 13 investment projects with a total commitment of $215.4 million, of which about $162 million remain to be disbursed. - Several new activities scheduled to be presented to the Board before the end of FY06. - Board approvals in June 2005: - (i) Natural Resources Development project (June 9); - (ii) Integrated Coastal Zone Management and Clean-Up project (June 21); - (iii) new power sector ECSEE-APL2-Albania project (June 29). - The World Bank is preparing three operations expected to be presented to the Board before the end of June 2006: - a) Business Environment Enhancement and Institutional Reform (BEEIR), - b) Education Excellence and Quality and Equity Project, - c) Health System Modernization Project. ### Bank-Fund Collaboration — Strategic Areas - The World Bank assistance will continue to support the IMF’s lead role on macro-economic policies aimed at facilitating sustainable growth. - Continued collaboration is critical because most outstanding reform areas remain structural. - In areas of direct interest to the IMF, the Bank is engaging in policy dialogue and providing financial and technical assistance to support: - (i) improved public expenditure management; - (ii) public sector reform; - (iii) pension, health and social assistance reform; - (iv) financial sector reform and development; - (v) an improved policy environment for business. ### Public Expenditure Management - Albania’s weak systems of Public Financial Management (PFM) and related fiscal institutions are a main risk for macroeconomic stability and high quality fiscal adjustment. - The Bank will continue to lead in this area through: - the ongoing Programmatic Public Expenditure and Institutional Review, - the upcoming Integrated Fiduciary Assessment (CFAA/CPAR-FY06). - These activities will identify key weaknesses in the PFM system and provide analysis for defining further public expenditure management components and policy reform conditionality in the DPL. - The Bank will support measures to improve strategic allocation of resources by: - supporting implementation of the Integrated Planning System (IPS); - improving linkages between recurrent and investment spending; - strengthening rigorous review of public investment projects based on economic and financial criteria. ### Public Sector Reform - Continued engagement is required on civil service and broader public sector employment structures to: - (a) restructure government apparatus by reducing the size of government and rendering it more efficient; - (b) increase competitiveness of the salary structure and the ability of the civil service to attract skilled and competent professionals; - (c) consolidate and deepen measures aimed at depoliticization of the civil service through expansion of the Civil Service Law in a fiscally responsible manner. - The Bank will use the DPL to continue engagement on civil service reform. ### Power Sector Reform - The electric power sector crisis since mid-2000 resulted from: - (i) excessive demand caused by chronic failure to curb illegal use and nonpayment; - (ii) vulnerability of mainly hydropower domestic generation capacity to hydrological variations; - (iii) transmission capacity constraints limiting electricity imports. - Consequences included frequent and prolonged load-shedding, significant allocation of budgetary resources for electricity imports, and diversion of funds from other critical needs. - Progress since 2001: electricity losses reduced, tariffs increased, collections improved; household demand growth has slowed; KESH restructuring, strengthened regulatory framework, tariff rationalization; efforts to add generation capacity and increase transmission import capacity. - Sector performance deteriorated in 2005 due to political uncertainties, changes in KESH’s management, and inability to arrange timely electricity imports; Government and KESH have expressed determination to sustain improvements. - Ongoing Bank projects with sector conditionality: - Power Sector Rehabilitation and Restructuring Project (2002) — rehabilitation of distribution network in three regions; - Power Sector Generation and Restructuring Project (2004) — new thermal generation capacity, co-financed by EBRD and EIB; - ECSEE APL2-Albania Project (2005) — co-financed by EBRD to finance upgrading of high-voltage transmission substations, facilitating participation in the Energy Community of South East Europe (ECSEE). - The Bank and the Fund confirmed support to Government efforts; sustained implementation of agreed measures is indispensable for growth and macroeconomic stability. ### Social Insurance Reforms - Financial stability of the social insurance system and coverage/targeting of social assistance are key to medium term fiscal consolidation. - Bank and IMF have focused on pension reform under PRSC and PRGF programs, including increase of the retirement age for men and women. - Short-term agenda: strengthen financial sustainability of existing pension scheme while aiming to reduce the overall payroll tax burden in the medium term to help improve competitiveness of Albanian labor. - The Bank is supporting SII to develop capacity to model medium- and long-term impacts of policy changes on fiscal sustainability and to identify a sustainable path for future reforms. - Bank and IMF will coordinate support and work to ensure essential pre-conditions for future structural reforms to the pension system, including strengthening of financial markets as a precondition for potential funded benefits systems. ### Financial Sector Reform and Development - Progress since transition to a market-based economy with support from the World Bank and IMF. - Financial Sector Adjustment Credit (FSAC), approved June 2002, advanced banking sector reforms including: - privatization of the Savings Bank, - development of a deposit insurance system, - improvement of bankruptcy framework and collateral enforcement, - strengthening bank regulation and supervision, - development of a Real Time Gross Settlement (RTGS) system. - IMF provided technical assistance to the Bank of Albania by funding a resident adviser to support banking supervision institutional development. - WBG and IMF will assist completion of the financial sector reform agenda and support implementation of recommendations from the Joint IMF-World Bank Financial Sector Assessment Program (FSAP). - The Business Environment Enhancement and Institutional Reform Project (expected board approval in June 2006) together with the DPL will support measures including: - (i) adoption of a legal, institutional and supervisory framework enabling sound development of the non-banking financial sector, including the insurance sector; - (ii) strengthening insurance and banking supervision and regulation and exit mechanisms for financial institutions; - (iii) adoption and implementation of an EU-compatible legal and institutional framework for accounting and auditing; - (iv) strengthening enforcement of the collateral regime; - (v) efficient and transparent completion of the privatization program. ### Coordination with European Commission Institutions - The reform agenda will be coordinated closely with European Commission institutions, especially in elements (such as accounting and auditing) where the acquis communautaire is relevant. *Source: _cr0654 - 2. The World Bank’s Board will discuss a new Country Assistance Strategy (CAS) for* ### 18. Improving the business environment. A weak business environment plagued with ### 18. Improving the business environment. A weak business environment plagued with ### Main findings on the business environment - The business environment is undermined by: - considerable administrative barriers, - weak governance, - corruption, - ambiguities in property and land rights, - poor quality and high cost of infrastructure and utilities. - These weaknesses are undermining future growth prospects and job creation. - Improving the business environment is crucial to: - overcome high levels of unemployment, - attract badly needed investment flows, - boost exports. ### Planned World Bank instruments and complementarities - The Bank will complement IMF dialogue on macro-economic stability and IMF technical and advisory assistance to strengthening tax administration. - Instruments to be used in conjunction with the DPL: - Business Environment Enhancement and Institutional Reform Project (expected board approval in June 2006) - Land Management and Urban Development project (expected board approval in January 2007) - Policy objectives supported through these instruments: - Adoption and implementation of regulatory governance rules and tools aimed at improving the quality of business-sector related regulations. - Further strengthening of the capacity to implement a EU-compliant competition policy regime. - Adoption and implementation of a transparent land registration system. ### Contact (as provided) - Prepared by World Bank staff. Questions may be addressed to Ms. Alia Moubayed at 473-0250 or Ms. Nancy Cooke at 38727. --- ### Statistical issues — overview - Albania was a pilot country for the data dissemination module of the Report on the Observance of Standards and Codes (ROSC); a data ROSC was published on the IMF’s external website in May 2000. - Albania participates in the General Data Dissemination System (GDDS); metadata for the external, financial, fiscal, and real sectors, as well as socio-demographic indicators, were initially posted on the Fund’s Dissemination Standards Bulletin Board (DSBB) in May 2000 and last updated in July 2005. - The authorities expressed interest in a ROSC data module using the Data Quality Assessment Framework (DQAF) and subscription to the Special Data Dissemination Standard (SDDS). - A five-year master plan for statistical development has been prepared for consideration by Parliament. - The new government plans to place the Institute of Statistics (INSTAT) under the Ministry of Interior (MI), aiming at closer placement to population and property registration functions under the MI. ### A. Real Sector — Price statistics and national accounts - Consumer Price Index (CPI): - CPI data are reported regularly for publication in International Financial Statistics (IFS). - In 2001, a revision of CPI weights was initiated by INSTAT based on a new household budget survey; a revised CPI was finalized in February 2002. - Estimation of imputed rent within the CPI was improved in 2003. - Producer Price Index (PPI): - A monthly PPI has been published quarterly since March 2002. - National accounts: - INSTAT published first official GDP estimates for 1996-2000 in January 2003 and preliminary estimates for 2001 later that year. - Preliminary GDP estimates for 2002 and revised estimates for 2001 were published in September 2004. - Preliminary GDP estimates for 2003 and revised estimates for 2002 were published in August 2003. - Fund technical assistance in this area continues (November 2003–November 2005) to address weaknesses in basic data sources and incomplete coverage of the private sector. - The Italian National Institute of Statistics (Istat) and the National Statistics Office of Finland (Statistics Finland) will be providing technical assistance to INSTAT following the Fund project. - STA missions visited Albania in November 2004 and in March 2005 to assist the authorities in improving the timeliness of national accounts data; authorities agreed with proposed approaches for compiling and disseminating early annual estimates and experimental quarterly estimates. ### External trade - Compilation and dissemination of foreign trade data improved following late-1990s disruptions. - Implementation of the Automated System of Customs Data (ASYCUDA), supported by the EU, was an important factor. - Further progress expected in trade in services as a result of implementation of surveys with STA support. ### B. Government Finance - Albania began reporting fiscal data to the Fund for publication in the 1996 Government Finance Statistics Yearbook and IFS. - Only data for 1997, 1998, and 2002, consistent with GFSM 1986 standards, have been reported for inclusion in the GFS Yearbook; Fund staff converted these data to the GFSM 2001 framework. - Albania does not currently report fiscal data for publication in the IFS. - Some improvement achieved in collection of data on disbursement of foreign loans and grants after UNCTAD technical assistance. - A foreign debt database has been established and is nearly operational, requiring only auditing for final implementation. - Further improvements required regarding accuracy and timeliness of information on foreign-financed capital expenditures and fiscal data in general. ### C. Monetary Accounts - Monetary data compilation conforms to the Monetary and Financial Statistics Manual methodology; data are compiled and reported timely. - Authorities revised accounts of the BoA, commercial banks, and the monetary survey from February 2001 onward to properly record repurchase and reverse repurchase agreements; revised monetary data were first published in the October 2002 IFS. - In January 2005, the BoA reported its monetary data to STA using Standardized Report Forms to facilitate an integrated monetary database for publication in IFS and operational needs of EUR. ### D. Balance of Payments - Data compiled by the BoA are methodologically sound, though some estimates—particularly for international transactions made outside the banking system—need refinement. - BoA established compilation procedures based on the fifth edition of the Balance of Payments Manual and reports quarterly data to STA regularly and timely. - Methodology for measurement of tourism services was revised principally through introduction of traveler surveys. - Problems remain in service transactions and remittances, monitoring of financial account transactions, foreign assistance, and external debt. - A November 2004 technical assistance mission recommended strengthening the legal framework and using the banks reporting system to verify enterprise survey data, incorporating the direct investment survey results, and investigating net errors and omissions at the level of individual reporting banks. - A follow-up STA mission is scheduled for FY06. - Albanian authorities have not yet initiated compiling data on foreign currency liquidity in line with the Data Template on International Reserves and Foreign Currency Liquidity; while the definition of official reserve assets is broadly consistent with the Template, other foreign currency assets and currency drains are not included. ### E. External Debt and Grant Statistics - Good quality external debt statistics for public and publicly-guaranteed debt are compiled by the Ministry of Finance. - The external debt database developed with UNCTAD technical assistance became fully operational in mid-2000 and ensures timely and accurate reporting of external government debt (including commitments of state-owned enterprises). - Irregularities have occurred in recording and presentation of old external arrears. - The External Debt Committee needs improved inter-agency coordination to ensure timely and accurate reporting of external arrears and changes from rescheduling agreements. - Collection of data on external grants is not timely, with lags of several months; authorities are preparing a new framework to improve data collection and reporting, to be led by the Ministry of Finance. --- ### Albania: External and Public Debt Sustainability Analysis (DSA) — main conclusions - Albania’s ability to sustain its debt burden has strengthened significantly in the past ten years. - Debt restructuring with main creditors, rapid growth, and cautious public indebtedness have allowed a continuous decrease in external debt-to-GDP and external debt-to-exports ratios (both on NPV and nominal terms); these are expected to stabilize in the medium term at about 20 percent of GDP. - Projected public debt service-to-exports ratios will remain between 5-7 percent. - Public debt is projected to decline below 53 percent of GDP in 2009. - Outcome appears fairly robust to stress scenarios but is sensitive to adverse current account and growth shocks. - Recommendation: Albania should aim at diversifying its exports to reduce external vulnerability and improve economic growth potential. ### Main assumptions for the baseline (2005-24) - Average annual real GDP growth: 6 percent - Inflation: 3 percent (central projection of the 2-4 percent target) - Export growth: - will significantly slow down compared to the historical average of 25 percent (in terms of Euros). - For the rest of this decade the annual growth projected is 12 percent and 9 percent for the rest of the projection period. - Average concessionality of public sector borrowing is expected to decrease gradually. - Real effective exchange rate will remain constant. - Private debt is expected to grow substantially albeit from a very low base, gradually replacing the share of public and publicly guaranteed external debt on total external debt. - Domestic public debt is projected to increase each year by the nominal amount consistent with meeting domestic borrowing targets of the new program under the average real growth assumptions. ### External debt sustainability findings - Albania is expected to maintain external solvency throughout the period. - Stock of total external debt-to-GDP ratio is expected to stabilize at about 20 percent. - Composition of debt will gradually shift to less concessional sources; private sector external borrowing importance projected to increase. - Slow long-run increase in NPV of total debt as percent of GDP and in debt service ratios as percent of exports is expected, but these indicators remain at manageable levels. - Albania has a low risk of debt distress given low external debt and the quality of policies and institutions. - World Bank CPIA classifies Albania as a medium performer; indicative debt sustainability thresholds for NPV of debt-to-GDP and debt-to-exports are 40 percent and 150 percent, respectively — thresholds are comfortably met by baseline projections and most stress tests. - Albania is currently a net creditor to the world (Table 1a in source). - Public sector has a small positive stock of net external debt at present but is expected to turn negative before the end of this decade under the baseline scenario. - Private sector net indebtedness is expected to turn positive during the projection period. ### Stress test results and vulnerabilities - Standardized stress tests indicate external debt would remain sustainable under several shocks; indicators stay below indicative benchmarks under most stress tests. - Indications that debt ratios tend to revert to baseline path over time. - Debt indicators are particularly sensitive to negative shocks to exports (bound test B2); B2 would be the only test where Albania would exceed temporarily the thresholds for its CPIA category. - Emphasis: need to diversify exports and improve competitiveness in the medium term. - Note on standard alternative scenario: scenario based on historical averages for current account deficit and nominal GDP growth is not representative for Albania because past high external current account deficits were driven by large infrastructure investments financed by official grants and concessional loans; with catching-up process approaching an end, need for such investments and availability of official grants and concessional loans are assumed to decline in the long run. ### Public debt sustainability - Ratio of public debt to GDP declined significantly in recent years. - Public debt estimated at 54.9 percent of GDP at end 2005, compared to 75.6 percent of GDP in [text ends]. *Prepared by World Bank staff; excerpted from the source document.* ### 1997. The reduction of the debt-to-GDP ratio reflected a number of factors, including ### _cr0654 - 1997. The reduction of the debt-to-GDP ratio reflected a number of factors, including ### Debt dynamics and baseline projections - Reduction of debt-to-GDP ratio reflected sustained average growth rates (at around 6 percent), and the accounting effects of the lek appreciation. - Consistent with the authorities’ medium term fiscal program, the baseline scenario projects a further decline of the debt-to-GDP ratio. - Authorities’ fiscal program implies a decline of the domestic borrowing target from an estimated 2005 level of 2.8 percent of GDP to 2.3 percent of GDP in 2009. - On the basis of this fiscal program and of a rebound in real growth from 2007, public debt is projected to decline below 53 percent of GDP by 2009. - The NPV of public sector debt is projected to decline from 52.7 percent of GDP in 2005 to 50.9 percent of GDP in 2009. ### Stress tests and vulnerability analysis - Standard stress tests show that Albania’s public debt position is relatively resilient to shocks; the NPV of the debt-to-GDP ratio remains below 60 percent under most tests. - The stress test yielding the highest ratio in 2009: Real GDP growth at one standard deviation below the baseline in 2005 and 2006. - However, a real growth shortfall of one standard deviation (compared to historical average) in 2005-2006 would imply a debt-to-GDP ratio equal to 66 percent (in NPV) in 2009. - Figure 1 indicators (2004-2009) summarized: - Net Present Value of Debt-to-GDP ratio: baseline and "Growth shock in 2005-06". - Net Present Value of Debt-to-Revenue Ratio: baseline and "Growth shock in 2005-06". - Debt Service-to-Revenue Ratio: baseline and "Growth shock in 2005-06". ### External debt (Table 1a) select indicators and flows (1996–2024, values preserved as presented) - External debt (nominal) time series excerpt (1996–2024): 28.6 40.1 34.3 31.2 31.6 28.5 25.2 22.2 20.4 19.7 20.0 19.9 19.1 19.1 19.8 19.9 20.2 - o/w public and publicly guaranteed (PPG): 28.6 40.1 34.3 31.2 31.6 28.4 25.2 22.0 19.2 17.9 17.9 17.8 17.2 17.0 17.0 16.5 15.5 14.8 - o/w private: 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 1.2 1.7 2.1 2.1 2.0 2.0 3.2 4.4 5.4 - Change in external debt (selected): -0.9 11.4 -5.7 -3.1 0.4 -3.1 -3.2 -3.1 -1.8 -0.7 0.3 -0.1 -0.4 -0.1 0.0 0.1 0.0 - Identified net debt-creating flows (selected): -0.9 14.8 -6.2 -12.1 -6.5 -6.4 3.5 1.0 -3.0 2.0 3.5 2.6 2.0 1.8 0.3 -0.3 -0.4 - Non-interest current account deficit (selected): 8.2 13.2 6.3 1.4 6.3 5.4 9.5 7.7 5.2 6.6 7.4 6.5 6.1 5.7 3.8 2.9 2.6 - Net FDI (negative = inflow) (selected): -3.2 -1.9 -1.6 -1.5 -3.9 -5.0 -3.0 -3.2 -4.6 -2.9 -3.2 -3.1 -3.4 -3.4 -2.9 -2.7 -2.6 - Net external debt (selected): 7.8 13.7 8.8 4.9 2.4 -2.5 -6.7 -5.9 -7.6 -8.0 -5.8 -3.6 -1.2 -1.2 -2.1 -3.7 -5.0 - o/w public sector (selected): 19.3 25.8 21.0 17.2 14.9 11.5 6.5 5.6 2.4 0.9 0.9 0.7 -0.8 -0.9 -2.8 -5.4 -7.4 - o/w private sector (selected): -11.5 -12.1 -12.2 -12.3 -12.5 -14.0 -13.2 -11.5 -10.0 -9.0 -6.7 -4.3 -0.4 -0.3 0.7 1.7 2.5 - NPV of external debt (selected years): 16.3 16.4 17.4 17.5 17.0 17.0 17.4 18.1 18.2 - In percent of exports (selected): 76.7 75.1 76.3 73.7 67.4 65.3 60.4 60.4 60.7 - NPV of PPG external debt (selected): 15.1 14.6 15.3 15.4 15.2 15.1 - In percent of exports (selected): 71.3 67.2 67.2 64.8 59.7 57.5 49.3 45.5 42.8 - Debt service-to-exports ratio (in percent) (selected): 7.5 12.3 8.7 4.0 4.0 4.1 6.8 5.3 4.5 4.8 6.7 7.2 9.4 9.8 9.0 8.7 - Total gross financing need (billions of Euros) (selected): 0.1 0.2 0.1 0.0 0.2 0.1 0.3 0.1 0.2 0.4 0.4 0.4 0.5 0.5 0.7 0.9 1.3 - Key macroeconomic assumptions (selected): - Real GDP growth (in percent) series excerpt: 9.1 -10.3 12.7 10.1 7.3 7.2 3.4 6.0 5.9 5.5 5.0 6.0 6.0 6.0 6.0 - GDP deflator in terms of Euros (change in percent) (selected): 4.9 -9.1 11.6 19.7 16.1 7.2 -1.2 -0.2 14.3 5.6 2.6 2.2 2.2 1.9 1.9 - Effective interest rate (percent) (selected): 1.7 1.7 1.7 1.5 1.2 1.2 1.6 1.8 1.6 2.2 3.6 4.0 4.6 4.9 5.1 5.6 5.8 - Growth of exports of G&S (in terms of Euros, in percent) (selected): 19.0 -26.4 31.3 116.2 32.3 23.3 2.7 7.2 25.4 13.7 11.7 12.7 11.2 11.1 10.2 8.1 8.1 - Growth of imports of G&S (in terms of Euros, in percent) (selected): 33.6 -15.3 20.6 34.0 38.8 21.6 10.3 4.7 14.1 16.3 10.5 8.1 9.5 8.6 7.9 7.5 7.6 - Grant element of new public sector borrowing (in percent) (selected): 17.3 14.0 16.0 14.5 12.8 10.1 9.9 9.2 - Memorandum item: Nominal GDP (billions of Euros) (selected): 2.4 1.9 2.4 3.2 4.0 4.6 4.7 5.0 6.0 6.7 7.2 7.8 9.2 9.9 14.6 21.5 29.2 ### Sensitivity analyses for public and PPG external debt (Table 1b highlights, 2004–24) - NPV of debt-to-GDP ratio baseline: 15 15 15 15 15 15 15 15 15 15 14 14 14 14 13 13 (actual/projections 2004–2024 excerpt). - Alternative scenarios and bound tests produce higher ratios under adverse shocks; examples (NPV of debt-to-exports ratio): - Baseline: 71 67 67 65 62 60 58 56 54 53 51 49 48 46 45 43 - A1 (Key variables at historical averages in 2004-23): 71 95 102 104 105 107 108 111 115 122 131 141 166 191 217 261 - B2 (Export value growth at historical average minus one standard deviation in 2005-06): 71 129 241 305 293 272 246 223 202 183 167 158 151 140 131 121 - Debt service ratio baseline and under scenarios (selected): baseline 4 4 6 6 7 7 7 7 7 7 7 6 6 6 6 6 (illustrative series), with large increases under export shocks (e.g., B2). ### Public sector debt sustainability (Table 2a and 2b highlights, 1997–2009) - Public sector debt (selected historical and projection values): 75.6 68.5 66.7 72.8 67.6 65.0 61.8 56.5 54.9 55.0 54.5 53.6 52.6 (years 1997–2009 excerpt). - o/w foreign-currency denominated (selected): 38.1 32.3 29.3 30.2 26.6 23.3 20.7 18.0 16.8 17.0 17.0 17.0 16.8 - Change in public sector debt (selected): 22.1 -7.1 -1.8 6.1 -5.2 -2.5 -3.2 -5.3 -1.7 0.1 -0.5 -0.9 -1.0 - Identified debt-creating flows (selected): 20.9 -12.4 -0.9 -1.5 -3.5 6.3 -1.8 -4.6 -1.5 0.0 -1.2 -1.4 -1.4 - Primary deficit (selected series): 7.3 1.6 1.9 2.4 3.6 2.7 0.2 1.4 2.8 2.2 0.6 0.7 0.2 0.2 0.2 0.4 - Revenue and grants (selected): 18.3 24.2 25.5 23.8 23.7 24.7 24.5 24.1 24.6 24.6 24.7 24.7 24.8 - grants (selected): 0.7 1.6 2.8 1.0 0.6 0.7 0.4 0.3 1.0 1.0 0.9 0.8 0.8 - Automatic debt dynamics (selected): 13.9 -14.0 -2.6 -2.2 -4.9 3.7 -1.9 -4.1 -1.8 -0.3 -1.2 -1.5 -1.4 - Contribution from average real interest rate (selected): 5.3 4.1 5.5 3.8 2.6 2.4 2.8 1.1 1.6 2.3 1.9 1.6 1.5 - Contribution from real GDP growth (selected): 6.1 -8.5 -6.3 -4.5 -4.8 -1.9 -3.5 -3.4 -2.9 -2.6 -3.1 -3.1 -3.0 - Contribution from real exchange rate depreciation (selected): 6.4 -5.2 -1.8 -1.5 -2.7 3.2 -1.1 -1.8 -0.4 0.0 0.0 0.0 0.1 - Residual, including asset changes (selected): 1.2 5.4 -0.9 7.6 -1.7 -8.9 -1.4 -0.7 -0.2 0.1 0.6 0.5 0.5 - NPV of public sector debt (selected): 53.6 52.7 53.4 52.8 51.9 50.9 - o/w foreign-currency denominated (selected): 15.1 14.6 15.3 15.4 15.2 15.1 - NPV of public sector debt-to-revenue ratio (selected): 222.8 214.5 217.0 213.8 210.2 205.5 - o/w external (selected): 62.9 59.6 62.3 62.3 61.8 60.9 - Debt service-to-revenue ratio (in percent) (selected): 33.8 37.6 30.1 25.1 18.9 17.7 19.3 17.0 14.8 16.3 15.1 15.1 14.8 - Primary deficit that stabilizes the debt-to-GDP ratio (selected): -3.7 8.8 5.2 3.4 6.7 2.2 0.6 0.8 1.1 1.2 - Key macro and fiscal assumptions (selected): - Real GDP growth (selected): -10.2 12.7 10.1 7.3 7.0 2.9 5.7 5.9 6.3 6.1 5.5 5.0 6.0 6.0 6.0 5.7 - Average nominal interest rate on forex debt (selected): 0.8 0.7 0.4 1.7 0.7 1.5 1.1 1.2 0.9 0.5 1.5 2.6 2.9 3.3 3.5 2.8 - Average real interest rate on domestic currency debt (selected): 10.8 13.8 18.0 11.1 7.1 5.8 7.2 3.3 8.6 5.4 4.7 5.8 4.9 4.2 4.0 4.7 - GDP Deflator (percent change) (selected): 9.8 13.6 4.5 4.3 3.5 3.3 3.4 6.0 9.9 9.8 3.5 2.4 3.0 3.3 3.2 3.1 - Growth of real primary spending (selected): -2.3 13.8 17.3 2.2 11.6 3.4 -5.0 9.6 4.8 8.7 4.0 5.7 4.4 5.9 6.2 5.2 - Grant element of new external borrowing (selected): 17.3 14.0 16.0 16.8 14.5 15.7 ### Sensitivity analyses for public sector debt (Table 2b highlights, 2005–2009) - NPV of Debt-to-GDP Ratio baseline (2005–2009 excerpt): ... 54 53 53 53 53 52 51 - Alternative scenarios and bound tests (examples): - A1. Real GDP growth and primary balance at historical averages: ... 54 54 55 65 85 85 89 (series excerpt format preserved in table) - B1. Real GDP growth at historical average minus one standard deviation in 2005-2006: ... 54 57 63 64 65 66 65 - B4. One time 30 percent real depreciation in 2005: ... 54 59 59 59 57 56 - NPV of Debt-to-Revenue Ratio and Debt Service-to-Revenue Ratio also presented with scenario breakdowns (values preserved in table excerpts). ### Policy framework: PRGF three-year arrangement (excerpt) - A three-Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF) is described in the attached Letter dated January 11, 2006, with annexed Memorandum on Economic and Financial Policies for 2006 and Technical Memorandum of Understanding. - Arrangement terms (selected): - For a period of three years from February 1, 2006, Albania will have the right to obtain disbursements from the Trustee in a total amount equivalent to SDR 8.5225 million, subject to the availability of resources in the PRGF Trust. *Source: Staff projections, simulations, and Fund staff estimates and projections as presented in the supplied document.* ### 3.6525 million until February 1, 2007 and the equivalent of SDR 6.0875 million until ### _cr0654 - 3.6525 million until February 1, 2007 and the equivalent of SDR 6.0875 million until ### Disbursement schedule under the arrangement - Total right to make purchases for three years from February 1, 2006: equivalent to SDR 8.5225 million (stated later for extended arrangement). - Specific disbursements during the arrangement: - First disbursement: amount equivalent to SDR 1.2175 million, available on or after February 1, 2006, at the request of Albania. - Second disbursement: amount equivalent to SDR 1.2175 million, available on or after August 1, 2006, at the request of Albania and subject to paragraphs 4 and 5. - Third disbursement: amount equivalent to SDR 1.2175 million, available on or after February 1, 2007, at the request of Albania and subject to paragraphs 3, 4 and 5. - Purchases under the extended arrangement (aggregate phasing limits without Fund consent): - not to exceed the equivalent of SDR 1.2175 until August 1, 2006, - the equivalent of SDR 2.435 million until February 1, 2007, - the equivalent of SDR 3.6525 million until July 1, 2007, - the equivalent of SDR 4.87 million until January 1, 2008, - the equivalent of SDR 6.0875 million until July 1, 2008, - the equivalent of SDR 7.305 million until January 1, 2009. ### Conditions and phasing for disbursements - Paragraph 3: Remaining conditions for the third disbursement (paragraph 2(c)) to be determined in the context of the first review under Albania’s PRGF arrangement. Right to request further disbursements during second and third years subject to phasing and conditions determined in subsequent reviews. - Paragraph 4 (triggers preventing requests for second and third disbursements): - The Trustee may find, with respect to the second disbursement using data as of March 31, 2006, and with respect to the third disbursement using data as of September 30, 2006, that any of the following specified in Table 1 of the Memorandum and further specified in the TMU was not observed: - (i) the ceiling on net domestic credit to the government, - (ii) the ceiling on net domestic assets of the Bank of Albania, - (iii) the floor on net international reserves of the Bank of Albania, - (iv) the ceiling on contracting or guaranteeing of public and publicly-guaranteed non-concessional external debt with original maturities greater than one year. - Structural performance criteria failures by March 31, 2006: - (i) failure to further extend the use of ASYCUDA in customs administration by: deploying the ASYCUDA system in 10 customs houses; and implementing the risk assessment module of the ASYCUDA system in 10 customs houses to perform inspections (as specified in Table 2 and paragraph 20 of the Memorandum). - (ii) KESH not meeting targets with respect to collection rates and losses, as set out in the Power Sector Action Plan dated January 13, 2006 (as specified in Table 2 and paragraph 20 of the Memorandum). - Disbursements also blocked: - (c) until the Trustee has determined that, for the second disbursement, the first program review (paragraph 25 of the Memorandum), and for the third disbursement, the second program review (paragraph 25 of the Memorandum), has been completed. - (d) until the Trustee has determined that, with respect to the second and third disbursements, so long as Albania has outstanding sovereign external payments arrears to private creditors, or by virtue of Albania’s imposition of exchange controls there are outstanding non-sovereign external payments arrears, a financing assurance review is completed. - Paragraph 5 (additional prohibitions on requests for any disbursement during the arrangement): - (a) If at any time the government contracts or guarantees public and publicly-guaranteed external debt with original maturities up to and including one year as specified in Table 1 of the Memorandum and further specified in the TMU. - (b) If at any time the government accumulates any new external payment arrears, excluding interest on pre-existing arrears as specified in Table 1 of the Memorandum and further specified in the TMU. - (c) If Albania: - (i) imposes or intensifies restrictions on payments and transfers for current international transactions; - (ii) introduces or modifies multiple currency practices; - (iii) concludes bilateral payments agreements that are inconsistent with Article VIII; - (iv) imposes or intensifies import restrictions for balance of payments reasons. - Paragraph 6: Where prevented from requesting disbursements under paragraphs 4 and 5, disbursements may only be made available after consultation between the Trustee and Albania and understandings have been reached regarding circumstances for further requests. ### Reporting, consultations, and information provision - Paragraph 7: Albania will provide the Trustee with such information as the Trustee requests regarding progress in implementing policies and reaching objectives of the program supported by the arrangement. - Paragraph 8: During the arrangement, Albania shall remain in close consultation with the Trustee in accordance with paragraph 4 of the Letter; Albania shall consult on adoption of any measures at government initiative or whenever the Managing Director requests consultation. After the arrangement, while Albania has outstanding financial obligations to the Trustee from loan disbursements under the arrangement, Albania will consult from time to time at government initiative or at the Managing Director’s request; consultations may include correspondence and visits of officials. ### Extended Arrangement provisions (summary) - Attachment heading: "ALBANIA Extended Arrangement" with an attached Letter dated January 11, 2006 and annexed Memorandum on Economic and Financial Policies for 2006 (the “Memorandum") and Technical Memorandum of Understanding (the “TMU”). - Paragraph 1: For a period of three years from February 1, 2006 Albania will have the right to make purchases from the Fund in an amount equivalent to SDR 8.5225 million, subject to paragraphs 2, 3, 4, and 5, without further review by the Fund. - Paragraph 2: Purchases under the extended arrangement phased as listed in the Disbursement schedule section above (SDR amounts and dates). - Paragraph 3: Albania will not make purchases during any period where data for the preceding period indicate non-observance of the same performance criteria listed (ceilings/floor specified in Table 1 and TMU); or failure to meet ASYCUDA deployment or KESH targets by March 31, 2006; or contracting short-term non-concessional external debt; or accumulating new external payment arrears; or until specified reviews and financing assurances are completed; or if Albania imposes/intensifies restrictions on payments and transfers, introduces/modifies multiple currency practices, concludes bilateral payments agreements inconsistent with Article VIII, or imposes/intensifies import restrictions for balance of payments reasons. Purchases resume only after consultation and understandings reached. - Paragraph 4: Purchases barred while Albania has an overdue financial obligation to the Fund or fails to meet certain repurchase expectations or repayment obligations as detailed (references to Fund Decisions and PRGF Trust provisions are listed verbatim in source). - Paragraph 5: Suspension of Albania’s right to engage in transactions under the arrangement can occur only with respect to requests received after (a) a formal ineligibility, or (b) a decision of the Executive Board to suspend transactions; purchases resume only after consultation and understandings reached. - Paragraph 6: Purchases to be made in currencies of other members selected in accordance with Fund policies and procedures unless Albania requests SDRs at time of purchase. - Paragraph 7: Albania shall pay a charge for the extended arrangement in accordance with Fund decisions. - Paragraph 8: - (a) Albania shall repurchase the amount of its currency that results from a purchase under the extended arrangement in accordance with Articles of Agreement and Fund decisions, including those relating to repurchase as Albania’s balance of payments and reserve position improves. - (b) Any reductions in Albania’s currency held by the Fund shall reduce amounts subject to repurchase under (a) in accordance with Fund principles applied at the time of reduction. - Paragraph 9: During extended arrangement Albania shall remain in close consultation with the Fund and provide reports at intervals or dates requested by the Fund with such information as requested on progress in achieving objectives and policies set forth in the attached Letter and Memorandum. - Paragraph 10: Albania will consult with the Fund on any measures at government initiative or whenever the Managing Director requests consultation because any criteria in paragraph 3 have not been observed or the Managing Director considers consultation desirable; after the arrangement and while Albania has outstanding purchases under the arrangement, the government will consult with the Fund from time to time concerning Albania’s balance of payments policies. ### Attachment I: Letter dated January 11, 2006 (extracts and intentions) - Letter asserts: - Request for a new three-year Poverty Reduction and Growth Facility arrangement in an amount equivalent to SDR 8.5225 million (17.5 percent of quota) together with a concurrent three-year Extended Fund Facility arrangement in the same amount. - Statement that prior actions agreed with Fund staff have been completed, including passage of a 2006 budget consistent with the negotiated program. - Commitment to consult with the IMF on adoption of further measures and to consult while outstanding financial obligations to the IMF exist; consultations may include correspondence and visits. - Consent to publication of the letter, attached MEFP, and accompanying Executive Board documents on the IMF’s website. ### MEMORANDUM on Economic and Financial Policies (MEFP) — Background (extracts) - Program period: proposed 2006-2009. - MEFP consistency: with November 2001 National Strategy for Socio-Economic Development (NSSED) and May 2003, May 2004, and July 2005 NSSED Progress Reports; updated NSSED for 2007-09 to be completed by end-2006. - Macroeconomic context: - Trend growth described as strong. - Inflation described as in the 2-4 percent range. - Public debt ratio declined to an estimated 55 percent of GDP at end-2005 — a reduction of 9½ percentage points since end-2002. - Structural progress summarized: - Banking sector: privatization of the Savings Bank in 2004; all commercial banks under private management. - Payment systems: completion of real-time gross settlement system and bulk settlements system; increased switching of public sector salary payments from cash to banks. - Fiscal: adoption of realistic revenue projections; reforms to budget process including greater parliamentary oversight; 2005 budget delivered the first surplus on current operations since transition began. - Privatization: sale of Albtelecom expected in early 2006; preparations for sale of the Italian-Albanian Bank; stated use of privatization receipts — half to reduce public debt and half expended in priority areas. - Statistics: adoption of first Statistical Master Plan. *Source: Text of IMF staff report attachments and associated Letter and MEFP contained in the provided PDF content.* ### 4. Reform of our revenue agencies has also been generally positive, although much ### _cr0654 - 4. Reform of our revenue agencies has also been generally positive, although much ### Revenue administration and customs — progress and measures - ASYCUDA system extended to 9 customs houses, with related procedural reform in customs administration, including implementation of the ASYCUDA risk assessment module for conducting inspections in 2 customs houses. - Quick VAT refund system implemented for exporters; progressed as planned towards eliminating the stock of VAT refund arrears. - Short-term target: ASYCUDA (including the risk assessment-based inspection selection module) will be deployed in 10 customs houses by end-March 2006 (PC). - Reporting commitment: a report on progress in utilization of the risk module will be issued on a quarterly basis (SB; ongoing). - Prior VAT arrears: almost all VAT arrears originating prior to June 2004 have been cleared; the remainder will be cleared in 2006. - Commitment to provide quarterly reports to the Fund on aggregate VAT refunds requested, paid, and rejected (SB; ongoing). - Tax administration modernization aims to reshape revenue collection agencies into modern organizations relying on self-assessment and voluntary compliance, with full compliance with existing legislation and regulation regarding human resource issues and procedures. ### Key governance, institutional, and infrastructure weaknesses - Persistent deficiencies: poor infrastructure and weaknesses in governance and institutions continue to limit investment—particularly foreign investment—needed to boost productivity and expand exports. - Recent electricity supply disruptions attributed to poor water reserves management until early September and ill-designed procurement rules, highlighting the need for large investments and structural reform in the energy sector. - Continued weaknesses in revenue administration and public debt management leave the economy vulnerable to economic shocks. - Quality of public expenditure needs improvement to better utilize scarce resources for economic development and poverty reduction. - Financial sector requires further reform and modernization, albeit to a lesser degree. - Social indicators: some poverty-related indicators have improved, but advances are not uniform; enrollment ratios in education need improvement. ### Program objectives (next three years) - Concentrate on: maintaining macroeconomic stability, enhancing growth potential, reducing vulnerabilities, strengthening government solvency. - Macroeconomic stability: - Further fiscal consolidation centered on steady reduction of domestic borrowing and improvement in the current and primary balances. - Strengthen the monetary policy framework and financial supervision capacity. - Growth potential: - Revenue and expenditure reforms to promote high quality public and private investment. - Structural reforms: complete privatization process; improve commercial court system; improve land title registration; improve the business environment. - Investments in alternative energy sources and restructuring of KESH to reduce electricity supply volatility. - Government solvency: - Declining public debt relative to GDP and improvements in revenue administration and public debt management. - Reforms to limit contingent liabilities (e.g., in the electricity sector). - Significantly lengthen the average maturity of domestic public debt as a critical measure. ### Macroeconomic framework and projections - Real GDP growth projection: fall to 5 percent in 2006, from an estimated 5½ percent in 2005, due to the difficult situation in the electricity sector. - Medium-term expectation: return to the historical 6 percent trend as sectoral issues are resolved and investment rises. - Inflation target: hold inflation to 3 percent—with a tolerance range for deviations of plus or minus one percent. - Public savings expected to rise over the program period through improved revenue administration and reduced share of current expenditure in total spending, including lower interest costs from better debt management. - Expectations of a rise in private—mainly corporate—savings in response to structural reform and rapid economic growth. - Current account: with public and private investment rising at a lower pace, current account will gradually improve and the growth contribution of net exports will rise. - Precautionary measures: use of budgetary contingencies, conservative tax and privatization receipts estimates, and policy of not expending gains from tax administration reforms before realization. - If additional receipts materialize, the authorities will consult with the Fund and submit a supplementary budget to parliament. ### Monetary policy, exchange rate, and financial sector measures - Monetary policy directed to keep inflation at 3 percent—with a tolerance range for deviations of plus or minus one percent. - Retain current monetary framework: reserve money program with quantitative targets set in consultation with the Fund and changes to the repurchase rate as the main policy instrument, so long as it remains effective. - Acknowledgement of rapid banking system change: credit growth exceeded 70 percent in October 2005; demand and supply of credit expected to remain strong into the medium term. - Possibility of temporary use of direct instruments for controlling credit provision—in consultation with the Fund—given limited effect of policy rate changes on credit demand, particularly foreign currency denominated credit. - Flexible exchange rate regime retained; interventions limited to smoothing seasonality and short-term shocks and maintaining an adequate reserve level. - Medium-term goal: move to an inflation targeting regime; with Fund assistance, identify necessary steps and formulate an action plan. - Financial sector reform guided by the Financial Sector Stability Assessment (FSSA) report: - Establish a joint government-BoA task force to work with Fund staff to develop an action plan (SB; end-March 2006). - Priorities: improve financial intermediation and supervisory capacity, reduce cash use, promote financial sector efficiency, strengthen supervisory capacity in insurance and private pensions, establish effective and independent regulatory authority. - Completed/ongoing reforms: - Payment of public sector wages through the banking system now in place for over 75,000 employees. - Plans to extend banking payments further where feasible (including additional state-owned enterprise employees and encouraging tax/utility bill payments via banks). - Plans for a credit bureau (initially inside BoA) with World Bank and Albanian Bankers’ Association assistance. - Work with the Ministry of Justice to streamline execution of collateral procedures. - Seek technical assistance and advisor to strengthen prudential supervision in insurance; prioritize modernizing legal framework for private pension funds. - Maintain BoA treasury bill window; insist on use of the new bulk settlement system as a means of payment. - Accelerate preparations to divest government’s minority interest in the remaining commercial bank. - Refrain from creating public financial institutions or taking equity stakes or issuing explicit/implicit government guarantees to financial institutions. - No legislative/regulatory action to weaken BoA independence, including full control over the Bank’s budget—including staff compensation—exercised by the BoA’s Supervisory Board. ### Fiscal policy framework and targets - 2006 budget and medium-term fiscal framework designed to balance debt reduction with growth-enhancing and poverty-reducing expenditure. - Over the program period: - Expect a further 1 percentage point decline in public debt relative to GDP. - Fall in recourse to domestic financing from 2.8 percent of GDP in 2005 to 2.4 percent in 2008. - Total expenditure relative to GDP programmed to rise by only ¼ percentage point. - Projected improvement over 2005-08: current balance relative to GDP improves by about 1½ percentage points; primary balance improves by about ½ percentage point of GDP. - 2006 budget details: - Approved by Parliament in December 2005 as a prior action. - Incorporates tax measures to raise revenue by ¼ percent of GDP, but makes no allowance for immediate gains from tax administration measures. - Contingencies at about ¾ percent of GDP, twice as large as in 2005; allocated contingencies to be released only after consultation with the Fund and conditional on meeting indicative total tax revenue target for end-June 2006. - Conservative estimates used for interest costs, privatization receipts, and macroeconomic assumptions. - If sustainable overperformance occurs (e.g., tax administration gains and/or higher privatization receipts in first half), authorities will discuss with the Fund and submit a supplementary budget. - In 2006, any extra revenue from tax administration gains will be expended in full; privatization receipts formula: half used to reduce domestic debt and half spent on well-designed infrastructure projects, with consideration for a small portion to compensate former property owners. - In subsequent years, consider applying privatization formula to both sources of additional revenue in consultation with the Fund. ### Tax administration reform action plan and targets - Action plan guided by recommendations of a recent Fund technical assistance mission; developed into a prior-action plan for program approval. - Collection focus: refocus on large taxpayers. - Prior actions: include all firms meeting set criteria within the large taxpayer unit (LTU); integrated audit of social security contributions into LTU’s audit capacity. - Target: increase the share of tax revenue collected by the LTU—currently low by regional standards—to 50 percent of all tax collected by end-June 2006 (SB) (As defined in the Technical Memorandum of Understanding (TMU)). - Measures include refining LTU inclusion criteria and addressing large under-reporting of numbers of employees depressing social security and personal income tax receipts. - GDT efficiency and governance improvements: - Improve IT systems and reporting. - Develop higher standards of employee quality, including increased use of civil service examinations. - Increase use of risk-assessment software for audit selection; shift audit design to more narrow/single-issue focus. - Rationalize GDT office structure; review role of the tax police; institute better reporting capabilities and practices. - Anti-corruption measures: - Ministry of Finance to contract an NGO specializing in anti-corruption to operate tax and customs hotlines. - Initiate confidential questionnaire-based surveys in customs office and LTU, administered by an independent private firm, to collect information on corruption and chart improvement over time. ### Public expenditure, investment, and civil service reforms - With World Bank assistance, pursue measures to raise quality, efficiency, and productivity of expenditure and create room for additional public investment and priority spending. - Civil service reform goals: develop capacity to hire/retain skilled personnel, increase accountability, apply transparent promotion procedures, and improve public administration effectiveness. - Actions and timelines: - Complete a census of all budgetary sector employees, including salary levels and compensation, by end-June 2006 (SB). - Strengthen institutional framework for evaluating and prioritizing public investment projects via a public investment program as part of the Medium-Term Budget Framework (MTBF) to be reviewed by the World Bank. - MTBF to contain all contracted/planned investments for next three years including projected disbursements, amortization, and rate of return. - Establish and staff a public investment program department within the General Directorate of the Ministry of Finance (SB; end-June 2006). - Prepare and issue instructions for submitting public investment proposals consistent with the budget and medium-term plan (SB; end-June 2006). - Require an independent feasibility study for any large project financed by nonconcessional loans (SB; ongoing) and provide the Fund a biannual listing and status report of all projects considered for nonconcessional foreign financing (SB; ongoing). ### Public debt management reform - Improving public debt management is a central goal. - Current limitations: limited institutional capacity and short maturity of public debt raising vulnerability. - Develop a comprehensive action plan for improvement (SB; June 2006) following a Fund diagnostic mission tentatively scheduled for early 2006. - Objectives of debt management reform: - Significant increase in debt maturity structure and improvement of terms. - Significantly expanded capacity in analysis and risk management. - Better management of data and ability, by end of the program period, to independently produce debt sustainability reports. - Institutional/legal measures: - Develop a public debt law clearly defining responsibilities of different units. - Begin preparation and publication of an annual debt strategy. - Take steps to attract and retain qualified staff. - Initiate the process of obtaining a country credit rating as a first step to gaining direct access to international capital markets. *Italicized source: IMF staff report content provided in the supplied PDF excerpt.* ### 19. We shall develop a tax reform strategy in line with our overall priorities for the ### _cr0654 - 19. We shall develop a tax reform strategy in line with our overall priorities for the ### Tax reform strategy - Primary objective: promote employment and investment in the formal economy. - Approach: - Develop a tax reform strategy aligned with overall priorities for the coming four years and the medium-term fiscal framework. - Base future tax policy measures on this strategy. - Consider using part of revenue gains from tax administration reform, if and when they materialize, to reduce the tax wedge (noted as high by international standards). - Preserve fiscal discipline by assessing likely impacts of different tax reform options using quantitative analyses of tax collection data and relevant experience from other transition economies. ### Other structural reform — Electricity and water - Electricity sector measures: - Measures taken to restore electricity supply and further action to reverse deterioration in KESH performance. - New procurement rules introduced to facilitate electricity imports and transmission from neighboring countries. - Preparation (with World Bank and other donors) of an updated Power Sector Action Plan for 2006-2008. - Meeting targets for collection rates and losses in this plan is a structural performance criterion for end-March 2006. - Reconciled arrears between KESH and its budgetary and non-budgetary public consumers, including water supply companies, and paid outstanding 2005 amounts. - Maintain policy (introduced in 2005) not to provide subsidies for imports of electricity. - Given high electricity imports expected in 2006 and time to restore domestic production, alternative means to support KESH during financial recovery may include: - Loans contracted from the private banking sector, preferably without government guarantee. - Government support for rationalization of the electricity tariff structure to ensure cost recovery. - Re-evaluate interpretation of necessary collection efforts required by KESH to reclaim VAT on uncollectible invoices. - Continue budgetary transfer to low income households and ensure timely payment of electricity bills by budgetary and non-budgetary public institutions. - Water sector measures: - Continue working with the World Bank and other donors to restructure water supply companies and adjust water tariffs to reflect increased operating costs. ### Transport infrastructure - Objective: upgrade Albania’s transportation infrastructure to European standards. - Constraints and approach: - Limited financial resources mean large public investment projects must be within well-planned and prioritized national and sectoral investment strategies, consistent with the available fiscal envelope. - The NSSED and Albanian National Transport Plan (ANTP), financed by the European Union, provide the framework. - New large projects, e.g., Tirana-Durrës train rehabilitation project, should be incorporated into these strategies before further advancement. - ANTP suggests restructuring Albanian railways (HSH), improving services, supporting cost recovery, and enhancing sustainability. - Once restructuring is underway, limited investments on the Tirana-Durres line may be justified within a sound business plan for HSH. ### External policies - Trade: - Retain a liberal trade regime and continue implementing remaining WTO commitments regarding tariff policies. - Ultimate goals: conclude a Stabilization and Association Agreement and a free trade agreement with the EU. - Technical negotiations with the EU on the free trade agreement are at an advanced stage. - Concluded free trade agreements with neighboring countries have significantly boosted exchange with them. - External arrears: - Continue good faith efforts to conclude rescheduling of arrears on inoperative payments agreements. - Engaged in negotiations to conclude clearance process with official creditors by mid-2007 and with private creditors by mid-2008. - Provide biannual reports to the Fund on the outstanding stock of external arrears (SB; ongoing) within one month of the end of each quarter. ### Data issues and statistical improvements - Improve coverage of economic statistics over the program period to improve economic policy formulation. - 2006 deliverables: - Prepare advance GDP estimates for the first half of 2005 (SB; March 2006). - Prepare and publish preliminary 2004 national accounts (SB; March 2006). - With donor support: - Carry out a household budget survey and publish results of the Living Standards Measurement Survey (LSMS) to improve poverty assessment. - Implement new methods to improve GDP calculations, enterprise activity statistics, and national accounts for the agricultural sector. ### Program monitoring, reviews, and safeguards - Disbursement and reviews: - Second disbursement under PRGF/EFF-supported program based on: - End-March 2006 quantitative performance criteria (Table 1 and the TMU). - End-March 2006 structural performance criteria (Table 2 and the TMU). - Completion of the first review and financing assurances review. - First review under PRGF and EFF expected no later than August 1, 2006. - Second review expected no later than February 1, 2007. - Policy commitments during program period: - No imposition or intensification of restrictions on payments and transfers for current international transactions. - No introduction of multiple currency practices or bilateral payments agreements inconsistent with Article VIII. - No imposition or intensification of import restrictions for balance of payments reasons. - NSSED reporting: - Provide a fourth progress report on the NSSED by June 2006, taking into account recommendations of the joint staff assessment of the 2005 progress report. - Prepare a new NSSED for the 2007-09 period by end-2006. ### Quantitative performance criteria and indicative targets (March–December 2006) — key figures - All targets are cumulative changes from end-2005 except where marked. (Table context preserved.) - In billions of lek: - Ceiling on net domestic credit to the government: 7 12 18 24 (End-March, End-June, End-September, End-December 2006 Prog.Prog.Prog.Prog.) - Ceiling on accumulation of net domestic assets of the BOA 2/: 38 79 (End-March, End-September shown; table shows fewer entries) - Indicative total tax revenue target 3/: 4 187 134 188 (values appear as table entries under quarters) - In millions of US dollars: - Floor on accumulation of net international reserves of the BOA 2/: 2 217 111 138 (End-March, End-June, End-September, End-December entries) - In millions of euros: - Ceiling on contracting or guaranteeing of public and publicly-guaranteed non-concessional external debt with original maturities of more than one year: 15 30 50 70 - Ceiling on public and publicly-guaranteed external debt with original maturities up to and including 1 year 4/: 0 0 0 0 - Ceiling on accumulation of new external payments arrears, excluding interest on pre-existing arrears 4/: 0 0 0 0 - Notes (as presented): - 1/ The performance criteria and indicative targets outlined in this table, and their adjustors, are defined in the Technical Memorandum of Understanding (TMU). Targets are defined as cumulative changes from end-2005 except where marked. Data for end-March and end-September 2006 are performance criteria, except where marked. Data for end-June and end-December 2006 are indicative targets. - 2/ Cumulative change from end-September 2005. - 3/ Indicative target. Defined as all revenues collected by the GDT, GDC, and SSI. Aggregate revenue so defined includes all revenues collected on behalf of local governments, but excludes revenues collected by local governments directly. - 4/ Applies on a continuous basis. ### Performance criteria and structural benchmarks — selected actions and dates - Prior actions (Completed): 1. Parliament to approve 2006 budget in line with program targets. Completed 2. Strengthen the Large Taxpayers Office (LTO) by: - (i) Incorporating all firms meeting set criteria into the LTO. Completed - (ii) Integrating the audit of social security contributions into LTO's audit. Completed 3. Develop and discuss with IMF staff an action plan for implementing the recommendations of the IMF technical assistance mission on tax administration. Completed - Performance criteria (selected, with test dates): 4. Further extend the use of ASYCUDA systems in customs administration: - (i) Deploy the ASYCUDA system in 10 customs houses. End-March 2006 - (ii) Implement the risk assessment module of the ASYCUDA system in 10 customs houses to perform inspections. End-March 2006 5. KESH to meet the targets under the 2006-2008 Power Sector Action Plan for end-March 2006 with regards to collection rates and losses. End-March 2006 - Structural benchmarks (selected): A. Improve public expenditure management 6. Complete a census of the wage bill for all budgetary sector employees. End-June 2006 7. Strengthen public investment programming: - (i) Establish and staff a public investment program department within the General Directorate of the Ministry of Finance. End-June 2006 - (ii) Prepare and issue instructions for submitting public investment proposals consistent with the budget and the Medium-Term Budgetary Plan. End-June 2006 8. Safeguard the efficient use of nonconcessional foreign project loans: - (i) Conduct an independent feasibility study for any large project (as defined in the TMU) financed through non-concessional commercial borrowing. Ongoing - (ii) Provide a semestrial listing and status report on all projects being considered for nonconcessional foreign financing. Ongoing B. Reduce fiscal vulnerabilities — Strengthen tax administration 9. Improve VAT administration by preparing and providing to the Fund quarterly reports on the aggregate amounts of the VAT refunds requested, refunds paid and refunds rejected (within one month of the end of each quarter). Ongoing 10. Increase the share of tax revenue collected by the Large Taxpayer's Office to 50 percent of all tax collected by end- June 2006. End-June 2006 11. Prepare and issue quarterly reports on progress made in the actual use of the risk assessment module of the ASYCUDA system to perform inspections in the customs. Ongoing 12. Develop and discuss with IMF staff an Action Plan for implementing the recommendations of the IMF TA mission on debt management. End-June 2006 13. Prepare biannual reports (within one month of the end of each semester) on the stock of external arrears. Ongoing C. Strengthen the financial system and improve economic monitoring capability 14. Develop and discuss with IMF staff an Action Plan for implementing the recommendations of the Financial Sector Stability Assessment Report. End-March 2006 15. Strengthen statistical and economic monitoring capacity: - (i) Prepare advance GDP estimates for the first half of 2005. End-March 2006 - (ii) Prepare and publish preliminary national accounts for 2004. End-March 2006 ### Technical Memorandum of Understanding — key definitions and parameters - Government coverage for program purposes: State Budget, the Social Security Institute (SSI), and the Health Insurance Institute (HII). - Net domestic credit to the government (NCG): - Defined as gross domestic credit in lek and in foreign currency extended to the government by the banking system, savings and loan institutions (SLIs), and other domestic lenders; less the sum of government financial assets held in the banking system and in the SLIs. - Gross domestic credit includes: securities (including treasury bills and bonds) issued by the government and held by BoA, DMBs, SLIs, other domestic lenders; loans and advances to government; negative balances in government deposits with BoA, DMBs, SLIs. - Excludes: onlending of foreign project loans to all parts of government; advances on profit transfers by the BoA; claims held by units of government (e.g., SSI, HII). - Valuation rules: treasury bills at issue price for BoA and DMBs; other securities and direct loans to government held by BoA valued excluding accrued interest; DMB-held fixed and variable income securities at face value; SLIs and other domestic lenders at face value. - Government financial assets held in banking system and SLIs: - At BoA include: transferable deposits in domestic and foreign currency; lek deposits held in BoA for projects; standard gold deposits of the government. - Standard gold deposits valued at the program price of gold: SDR 326.6 per ounce. - Exclude: foreign currency deposits related to foreign financed projects; deposits serving as counterpart for non-standard gold and other precious metals owned by the government. - DMBs: all deposits of government in domestic and foreign currency; payable amounts owed by the DMB to government. - SLIs: all deposits of government held at the SLIs. - For monitoring, government financial assets in foreign currency converted from Lek to SDRs at end-of-period Lek/SDR exchange rate prevailing on test date; then to Lek at program Lek/SDR exchange rate of Lek 148.5/SDR. - Net domestic assets (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) less the net international reserves of the Bank of Albania. - For program monitoring, foreign currency assets and liabilities making up NIR will be valued at exchange rates of end-September 2005. - NDA level was Lek 82.0 billion as of end-September 2005. - NDA limits are cumulative changes from end-September 2005 and monitored from BoA accounts. - Net international reserves (NIR): - Defined as reserve assets minus reserve liabilities of the Bank of Albania. - Reserve assets include BoA holdings of monetary gold, SDRs, Albania’s reserve position in the IMF, foreign currency cash, securities, and deposits abroad; exclude pledged/collateralized assets, claims on residents, precious metals other than monetary gold, assets in nonconvertible currencies, illiquid assets, and claims from derivatives. - Reserve liabilities include foreign exchange liabilities to residents and nonresidents of the BoA irrespective of maturity, including foreign currency reserves of commercial banks held at BoA, all credit outstanding from the IMF, commitments from derivatives, and all arrears on principal or interest to commercial banks, suppliers, or official export credit agencies. Excluded: government’s foreign currency deposits at the BoA. - Reserve assets and liabilities expressed in U.S. dollars. - For monitoring, exchange rates of SDR and non-dollar currencies will be kept at end-September 2005 levels and holdings of monetary gold valued at SDR 326.6 per ounce. - NIR level was US$1,094.6 million at end-September 2005. - Adjusters for NCG, NDA, and NIR (privatization proceeds assumptions, cumulative from January 1, 2006): - End-March 2006: Lek 750 mn. (Of which: US$0.0 mn. in foreign currency); - End-June 2006: Lek 970 mn. (Of which: US$0.0 mn. in foreign currency). - End-September 2006: Lek 3,000 mn (Of which: US$19.8 mn. in foreign currency). - End-December 2006: Lek 3,000 million, (Of which: US$19.8 mn. in foreign currency). - Adjustment rules: - NIR floor adjusted upward (downward) and NDA ceiling adjusted downward (upward) by half of any excess (shortfall) in receipt of privatization proceeds in foreign currency from these assumed values. - NCG ceiling adjusted downward (upward) by half the amount of any excess (shortfall) in receipt of total privatization proceeds from these assumed values. *Source: Attachment I–II, Technical Memorandum of Understanding, _cr0654 (IMF).* ### 12. The ceilings on NCG and NDA, and the floor on NIR are defined based on the ### _cr0654 - 12. The ceilings on NCG and NDA, and the floor on NIR are defined based on the ### Ceilings on NCG and NDA, and floor on NIR — baseline assumptions and adjustments - Foreign budgetary and/or balance of payments loan financing (excluding IMF financing, project and commodity loans, and macro-financial assistance from the EU) is assumed, on a cumulative basis, from January 1, 2006, to: - End-March 2006 US$ 0.0 million - End-June 2006 US$ 0.0 million - End-September 2006 US$ 0.0 million - End-December 2006 US$ 0.0 million - If total foreign loan financing exceeds this projection: - The ceilings on NCG to the government and NDA of the Bank of Albania will be adjusted downward by the amount of the excess. - The floor on NIR will be adjusted upward by the amount of the excess. - 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 102.5 per U.S. dollar. ### NDA adjustment for reserve requirement changes - The 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. ### External debt and arrears — definitions and limits - Definition of “debt” (per point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt, Decision No. 12274–00/85, August 24, 2000): - Current, non-contingent liability created under a contractual arrangement providing value (assets or services) and requiring future payments in assets or services that discharge principal and/or interest. - Primary forms include: - (i) Loans (advances of money: deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements). - (ii) Suppliers’ credits (deferred payments for goods/services). - (iii) Leases (present value at inception of lease payments expected during agreement period, excluding payments covering operation, repair, or maintenance). - Arrears, penalties, and judicially awarded damages from failure to make payments under contractual obligations that constitute debt are debt. - Failure to make payment on an obligation not considered debt under this definition (e.g., payment on delivery) will not give rise to debt. - Medium- and long-term external debt limit: - Applies to contracting or guaranteeing by the government or the Bank of Albania of new nonconcessional external debt with original maturity > one year. - 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: 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 calculation: use OECD Commercial Interest Reference Rates (CIRRs); for maturities < 15 years use six-month averages of CIRRs; for maturities > 15 years use ten-year averages. - Debt within the limit shall be valued in euros at the exchange rate prevailing when the contract or guarantee becomes effective. - Short-term external debt limit: - Continuous basis on stock of short-term external debt owed or guaranteed by the government or the Bank of Albania with original maturity up to and including one year. - Applies to debt as defined above. - Excluded: rescheduling operations (including deferral of interest on commercial debt) and normal import-related credits. - Debt within the limit shall be valued in Euros at the exchange rate prevailing when the contract or guarantee becomes effective. - Performance criterion on external payment arrears: - Continuous prohibition on accumulation of new external payments arrears on external debt contracted or guaranteed by the government or the Bank of Albania. - External payment arrears defined as external debt service obligations (principal and interest) falling due after September 30, 2005 and not paid when due, taking into account contractual grace periods. - Exclusions to prohibition: - (i) Arrears arising from interest on the stock of arrears outstanding as of September 30, 2005. - (ii) External arrears subject to debt rescheduling agreements or negotiations. - Definition of large projects financed by nonconcessional foreign borrowing: - Projects involving total nonconcessional foreign borrowing in excess of Euro 20 million. ### Budget contingencies and wage bill census - Release of budget commitments related to contingencies embodied in the 2006 budget conditional on: - (i) At end-June 2006, actual revenue collection (all revenues collected by the GDT, GDC and SII, including revenues collected on behalf of local governments but excluding revenues collected by local governments directly) is in line with the indicative total tax revenue target specified under the program. - (ii) The decision to release the budget commitments is taken in consultation with the Fund. - A census of the wage bill will be carried out for all employees paid through the government budget, collecting salary and bonuses, grade, and position. ### Tax revenue monitoring and Large Taxpayer Office (LTO) structural benchmark - Collection of total tax revenue by the Tax and Customs Departments and social insurance contributions monitored via quarterly indicative floors; these include revenues collected by the GDT, GDC, and SSI (including revenues collected on behalf of local governments), but exclude revenues collected by local governments directly. - Structural benchmark (MEFP paragraph 15): share of taxes collected by the Large Taxpayer Office (LTO) to increase to 50 percent by end-June 2006. - Definition of LTO share: - Ratio of all taxes collected by the LTO to total collection of all taxes administered by the GDT (VAT, excises, corporate income taxes, personal income taxes, social security contributions, national taxes, taxes on packages, and gambling taxes). - In calculating ratio, social security contributions paid by budgetary institutions are excluded from the denominator. - Structural benchmark met if the ratio ≥ 50 percent for revenue collected between April 1 and June 30 2006, inclusive. ### Monitoring and reporting requirements — data providers and deliverables - Parties supplying data to the Fund: Bank of Albania, Ministry of Finance, General Directorate of Taxation (GTD), General Directorate of Customs (GDC), Ministry of Economy, and INSTAT. - Bank of Albania will supply monthly (except where noted): - (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) Banking sector prudential indicators; - (v) Net domestic credit to the government (in the form outlined in Appendix Table 1); - (vi) The net foreign assets of the Bank of Albania and their components; - (vii) Comprehensive information on reserve assets that are pledged, collateralized, or otherwise encumbered; - (viii) The foreign exchange cashflow of the Bank of Albania, including the level of NIR; - (ix) Daily average exchange rates; - (x) Trade flows; - (xi) Periodic updates of balance of payments estimates. - Ministry of Finance will supply: - (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 will be supplied within one month of the end of the reporting period; - (viii) Information on official grants for projects or budget support purposes; - (ix) Biannual reports on the stock and clearance of outstanding debit balances of inoperative bilateral payment agreements will be supplied within one month of the end of the semester; - (x) Information on expenditure arrears; - (xi) A biannual listing and status report of all projects being considered for nonconcessional foreign financing. - 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 internal audit. - General Directorate of Taxation will supply: - (i) Detailed monthly data on tax revenues collected; - (ii) Monthly data on the ratio of tax revenue collected by the LTO, as defined in paragraph 21 of this TMU. - Ministry of Economy will report quarterly or publish quarterly: - (i) All instances of nonpayment on agreed memorandums of understanding for repayment of the stock of end-December 2001 inter-enterprise government arrears; and progress in clearing inter-enterprise government arrears accumulated in 2002–2005. - (ii) A description of remedial actions undertaken in the event of non-payment on agreed MOUs for repayment of end-December 2001 inter-enterprise arrears. - INSTAT will supply: - (i) The consumer price index (CPI index) at the aggregated level and at the level of each individual item making up the basket; - (ii) The producer price index; - (iii) The construction cost index; - (iv) All short term indicators as they become available as defined in INSTAT’s quarterly publication “Conjoncture”; - (v) Preliminary estimates for Quarterly GDP on a regular basis and preliminary estimates for annual GDP disaggregated by 22 sectors distinguishing between the observed and non-observed economy. ### Key program monetary/fiscal numeric items and memorandum figures (selected, from Table 1) - Treasury bills held outside central government (Sep-05): 274,926 (In millions of lek) - Gross domestic credit to government (Sep-05): 309,300 (In millions of lek) - Assets of central government (excluding HHI and SSI) (Sep-05): 5,443 (In millions of lek) - Deposits held at Bank of Albania (Sep-05): 3,736 - In domestic currency (Sep-05): 1,964 - Transferable deposits in lek (Sep-05): 1,378 - Deposits in lek for projects (Sep-05): 586 - In foreign currency at program exchange rates and program price of gold (Sep-05): 1,772 - Standard gold deposits of government evaluated at fixed exchange rate and gold price (Lek mns.) (Sep-05): 1,655 - Number of ounces of gold equivalent (Sep-05): 37,297 - Assets held at deposit money banks (Sep-05): 1,707 - Deposits (Sep-05): 1,111 - Deposits in domestic currency (Sep-05): 207 - Deposits in foreign currency evaluated at program exchange rates (Sep-05): 904 - DMB payables to government (Sep-05): 597 - Deposits of HHI and SSI (Sep-05): 2,000 - Stock of Net domestic credit to central government (1+2-3-4) (Sep-05): 301,857 - Memorandum items: - Current exchange rate (Lek/SDR, eop) (Sep-05): 149.2 - Current exchange rate (Lek/US dollar, eop) (Sep-05): 102.5 - Program exchange rate (Lek/SDR, eop): 148.5 148.5 148.5 148.5 - Program price of gold: 326.63 326.63 326.63 326.6 - Market price of gold (price in US dollars per ounce): 473.4 - Current exchange rate (US dollar per SDR, eop): 1.4566 ### IMF staff representative statement (January 27, 2006) — selected developments - Year-on-year CPI inflation dropped to 2 percent in December, compared with a projected 3 percent, mainly due to lower-than-expected seasonal increases in the price of imported vegetables. - Evolution of monetary aggregates up to end-December appears broadly in line with projections; demand for lek was stronger than expected. - End-year holdings of gross international reserves were US$1,425 million, US$35 million higher than projected. - Preliminary fiscal data suggest net government borrowing in 2005 was somewhat below the program target. - Energy sector: - Abundant rainfall in December raised reservoir water levels, allowing temporary elimination of power cuts in Tirana during the holidays. - Situation less favorable in the countryside; floods affected economic activity. - Government approved the 2006-2008 Power Sector Action Plan on January 13, 2006, including collection and loss rate targets which are performance criteria in the proposed program. - Electricity imports secured for the first quarter of 2006; outlook for imports for the rest of 2006 uncertain due to increasingly difficult energy market conditions in Southern Europe. *Statement by the IMF Staff Representative, January 27, 2006* ### 4. All prior actions have been implemented. The 2006 budget passed by parliament is ### _cr0654 - 4. All prior actions have been implemented. The 2006 budget passed by parliament is ### Implementation status and preparatory actions - All prior actions have been implemented. - The 2006 budget passed by parliament is in line with program targets. - All firms meeting the set criteria have been incorporated into the Large Taxpayer Office (LTO). - The audit of social security contributions has been integrated into the LTO’s audit function. - An action plan to implement the recommendations of the IMF TA mission on tax administration, incorporating comments from IMF staff, has been developed. ### IMF approval and financing package - Executive Board approved concurrent three-year arrangements under the PRGF and EFF amounting to the equivalent of SDR 17.045 million (about US$24.7 million) for Albania. - Of this amount, the equivalent of SDR 8.5225 million (about US$12.3 million) will be available under each of the PRGF and EFF arrangements. - The approval enables Albania to draw the equivalent of SDR 2.435 million (about US$3.5 million) immediately. - The last PRGF arrangement for Albania amounted to SDR 28 million, was approved on June 21, 2002 and expired on November 20, 2005. ### Executive Board and management assessment (Anne O. Krueger) - Macroeconomic performance over the previous three-year PRGF-supported program: - Growth averaged close to 6 percent. - Inflationary expectations anchored at low levels. - Lek experienced a modest trend real appreciation. - Reserve holdings increased. - Public debt relative to GDP was reduced. - Structural reform progress: strengthened customs administration; use of banking system to pay public sector salaries; privatization of the last state-controlled bank. - Near-term outlook and risks: - Near-term growth and external prospects worsened somewhat in late 2005 due to disruptions in the electricity supply. - With full implementation of policies including the Power Sector Action Plan for 2006-08, the economy is expected to return to its potential growth rate of 6 percent by 2007. - Current account deficit projected to deteriorate in 2006 due to higher electricity imports, then improve as domestic production returns to normal. - Outlook for inflation: remain at about 3 percent throughout the period, but downside risks have increased. - Program design and objectives: - Reduce economic vulnerabilities, enhance growth potential, strengthen government solvency, protect priority spending, improve governance, and further develop the financial system. - Financing blend: half PRGF (concessional) and half EFF (nonconcessional) reflecting progress since the previous program. - 2006 budget contains strengthened contingency mechanisms and realistic revenue projections to protect planned priority expenditures on education, health care, and public investment. - Net domestic borrowing (key fiscal target) to decline gradually; increasing current fiscal surplus to concentrate expenditure on productive uses and limit borrowing to capital expenditure. - Privatization revenues and gains from improved tax administration, if realized, will be expended in priority areas or used for additional debt reduction. - Structural reform acceleration in key areas: comprehensive tax administration measures (emphasis on large taxpayers and compliance); action plan to improve public debt management; action plan to implement recommendations of the 2005 Financial Sector Stability Assessment; civil service reform; improvement of institutional framework for evaluating large projects; reform of the electricity sector; statistics improvements. ### Key projections and selected economic indicators (2001–09, selected lines) - Real GDP growth (percent): 2001: 7.0; 2002: 2.9; 2003: 5.7; 2004: 5.9; 2005 (Est.): 5.5; 2006 (Proj.): 5.0; 2007 (Proj.): 6.0; 2008 (Proj.): 6.0; 2009 (Proj.): 6.0 - Retail prices (avg., percent): 2001: 3.1; 2002: 5.2; 2003: 2.4; 2004: 2.9; 2005: 2.5; 2006: 3.0; 2007: 3.0; 2008: 3.0; 2009: 3.0 - Foreign savings (percent of GDP): 2001: 3/ 2.8; 2002: 7.2; 2003: 5.5; 2004: 3.8; 2005: 5.5; 2006: 6.7; 2007: 5.9; 2008: 5.7; 2009: 5.8 - Domestic savings (percent of GDP): 2001: 24.8; 2002: 17.4; 2003: 17.9; 2004: 20.0; 2005: 18.6; 2006: 18.0; 2007: 19.5; 2008: 20.4; 2009: 21.0 - Investment (percent of GDP): 2001: 27.6; 2002: 24.5; 2003: 23.4; 2004: 23.8; 2005: 24.2; 2006: 24.7; 2007: 25.4; 2008: 26.1; 2009: 26.8 - Revenues and grants (percent of GDP): 2001: 23.7; 2002: 24.7; 2003: 24.5; 2004: 24.1; 2005: 24.6; 2006: 24.6; 2007: 24.7; 2008: 24.7; 2009: 24.8 - Tax revenue (percent of GDP): 2001: 19.8; 2002: 20.6; 2003: 21.3; 2004: 21.7; 2005: 21.7; 2006: 21.8; 2007: 21.9; 2008: 22.0; 2009: 22.1 - Social security contributions (percent of GDP): 2001: 3.8; 2002: 4.1; 2003: 4.2; 2004: 4.3; 2005: 4.3; 2006: 4.4; 2007: 4.5; 2008: 4.5; 2009: 4.5 - Expenditures (percent of GDP): 2001: 31.6; 2002: 31.4; 2003: 29.0; 2004: 29.2; 2005: 28.3; 2006: 28.7; 2007: 28.2; 2008: 28.0; 2009: 27.9 - Overall balance (including grants, percent of GDP): 2001: -7.9; 2002: -6.6; 2003: -4.5; 2004: -5.1; 2005: -3.8; 2006: -4.1; 2007: -3.5; 2008: -3.4; 2009: -3.2 - Net domestic borrowing (percent of GDP): 2001: 3.1; 2002: 3.3; 2003: 2.9; 2004: 2.3; 2005: 2.8; 2006: 2.6; 2007: 2.5; 2008: 2.4; 2009: 2.3 - Public debt (percent of GDP): 2001: 67.6; 2002: 65.0; 2003: 61.8; 2004: 56.5; 2005: 54.9; 2006: 55.0; 2007: 54.5; 2008: 53.6; 2009: 52.6 - External debt (including publicly guaranteed, percent of GDP): 2001: 26.6; 2002: 23.3; 2003: 20.7; 2004: 18.0; 2005: 16.8; 2006: 17.0; 2007: 17.0; 2008: 17.0; 2009: 16.8 - Broad money growth (percent): 2001: 20.2; 2002: 5.7; 2003: 8.7; 2004: 13.5; 2005: 13.9; 2006: 12.0; 2007: 12.0; 2008: 12.7; 2009: 12.8 - Private credit growth (percent): 2001: 23.4; 2002: 41.0; 2003: 31.1; 2004: 36.9; 2005: 69.1; 2006: 43.2; 2007: 35.3; 2008: 29.6; 2009: 26.7 - Current account balance (excluding official transfers, percent of GDP): 2001: -5.8; 2002: -10.0; 2003: -8.1; 2004: -5.5; 2005: -7.0; 2006: -8.1; 2007: -7.3; 2008: -6.9; 2009: -6.9 - Current account balance (including official transfers, percent of GDP): 2001: -2.8; 2002: -7.2; 2003: -5.5; 2004: -3.8; 2005: -5.5; 2006: -6.7; 2007: -5.9; 2008: -5.7; 2009: -5.8 - Official transfers (percent of GDP): 2001: 3.0; 2002: 2.8; 2003: 2.6; 2004: 1.7; 2005: 1.5; 2006: 1.4; 2007: 1.3; 2008: 1.2; 2009: 1.1 - Gross international reserves (in millions of Euros): 2001: 826; 2002: 845; 2003: 834; 2004: 1,025; 2005: 1,147; 2006: 1,225; 2007: 1,329; 2008: 1,483; 2009: 1,650 - Nominal GDP (in billions of lek): 2001: 588; 2002: 625; 2003: 683; 2004: 766; 2005: 837; 2006: 900; 2007: 982; 2008: 1,076; 2009: 1,177 ### Recent economic developments and vulnerabilities (Annex highlights) - Albania’s macroeconomic performance has been strong in recent years; medium-term prospects remain relatively favorable. - Near-term growth and external prospects worsened in late 2005 due to electricity supply disruptions: - Growth declined to 5 ½ percent in 2005 from about 6 percent in 2004. - Current account deficit worsened. - Macroeconomic challenges and outstanding reform needs: revenue administration, public debt management, financial market development, civil service, and expenditure management. ### Program summary and policy framework - Program aim: prepare Albania for graduation from Fund-supported programs; maintain sound financial policies; promote reforms to enhance growth potential, strengthen solvency, reduce vulnerabilities, protect priority expenditure, and improve governance and business climate. - Projection targets and policy anchors: - Real GDP projected to return to trend growth rate of 6 percent by 2007. - Inflation to remain in the Bank of Albania’s 3 percent +/- 1 percent range. - Additional fiscal consolidation and strengthened monetary framework to maintain macro stability. - Reforms in tax administration and expenditure management to allow increased quantity and quality of public investment alongside declining debt-to-GDP ratio. - Domestic borrowing to be gradually reduced; current and primary fiscal balances to improve. - Measures to reform public debt management and the electricity sector to reduce vulnerabilities. - PRGF terms: annual interest rate of 0.5 percent; repayable over 10 years with a 5 ½-year grace period on principal payments. - EFF terms: repayment terms 10 years with a 4 ½-year grace period; interest rate, adjusted weekly, is currently about 4.30 a year. ### Statement by Albanian authorities (Arrigo Sadun and Carlo Gola) - Authorities express appreciation for the comprehensive report and support a three-year PRGF-EFF arrangement as a base for a timely and successful exit strategy. - Authorities intend to maintain the current positive track record with the Fund and implement key structural reforms, proceed with fiscal consolidation, continue institution building, and eradicate poverty. ### Fiscal policy commitments and specifics - Government committed to prudent, growth-supportive financial policies and a medium-term fiscal framework to gradually reduce public debt-to-GDP. - Key program target: reduce recourse to net domestic borrowing from the current 2.8 percent of GDP to 2.3 percent by 2009. - Contingent expenditures mechanism for the 2006 budget: contingent expenditure equals about 7 billions leks (0.75 percent of GDP), releasable mid-year if revenues meet budget targets after consultation with the Fund. - Privatization receipts usage: half to reduce domestic debt and half for well-designed infrastructure projects. - Revenue composition concern: personal income and social securities contributions amount to only 5.2 percent of GDP while total revenues is [text cuts off in source]. *Source: _cr0654 - 4. All prior actions have been implemented. The 2006 budget passed by parliament is* ### 24.6 percent of GDP). The implementation of the recently established Large Taxpayer Unit ### _cr0654 - 24.6 percent of GDP). The implementation of the recently established Large Taxpayer Unit ### Tax revenue, administration, and the informal economy - Implementation of the recently established Large Taxpayer Unit should reduce the under-reporting of employees by large companies. - The General Department of Taxation will be reorganized with the aim to create a modern tax administration. - Implementation of the ASYCUDA computer system in the area of consumer administration is almost completed. - The informal economy is estimated at about 30 percent of GDP and is particularly high in the services sector and small companies. - A reduction of the tax wedge should facilitate the process of reducing informality. - The authorities recognize that increasing government revenues requires cultural change and broadly based support and compliance, as noted in the Poverty Reduction Strategy report. ### Budget and public debt management - Improving budget debt management is crucial given the current very short maturity of the debt (on average about 6.5 months). - Authorities intend to proceed expeditiously to obtain a country rating with the aim of gaining direct access to international capital. - Technical aspects of enhancing debt management are being addressed alongside the rating objective. ### Banking sector and monetary policy - The Albanian banking system remains relatively underdeveloped despite recent progress, including the privatization of the large Saving Bank in 2004. - Intermediation and credit statistics: - About 52 percent of GDP held by banks as deposits. - Only 13 percent of GDP is extended as credit to the private sector. - Sectoral developments and payment systems: - Demand for credit is expanding at a strong pace. - In the public sector almost all wages are now paid through current accounts. - 70 percent of companies use banks. - The payment system is shifting from a cash-based economy toward electronic payments. - Priority: establish a “credit information bureau,” under the lead of the Bank of Albania, to improve monitoring of credit risk by commercial banks. - Degree of dollarization and monetary transmission: - Foreign currency deposits are about 36 percent of total deposits. - Dollarization can partially impair the efficiency of the monetary transmission mechanism. - Bank of Albania (BoA) practices and objectives: - BoA has coped with structural weakness through a very rigorous and transparent policy. - Credibility of monetary policy helped contain inflation expectations. - Authorities are determined to preserve the independence of the Bank and to enhance its technical capabilities. - Importance of conducting macroeconomic policy in a transparent and credible manner and maintaining a relatively high level of reserve cover. - Foreign exchange policy: - Foreign exchange market interventions are kept at a minimum so as not to interfere with the informal inflation target; interventions are finalized to smooth out excessive exchange rate volatility and to preserve an adequate level of foreign reserves. - Authorities, with Fund assistance, intend to move gradually toward a formal inflation target, recognizing several pre-conditions are required and the passage must be carefully designed. - Strong inflows of remittances can be a potential source of real appreciation; it is important to increase productivity and contain labor costs to preserve competitiveness. ### Structural reforms and infrastructure - Three economic priorities: improve infrastructure, enhance institution building, and substantially reduce poverty. - Power sector: - The recent power shortage showed the Power Sector Action Plan must be a top priority. - New procurement rules facilitate electricity imports and transmission from neighboring countries. - Authorities are taking action to improve performance of the state owned electricity company KESH and are working with the World Bank and other donors to restructure the water supply company. - Transportation infrastructure needs substantial improvements; authorities intend to proceed according to a well-planned and prioritized investment strategy and consider new large projects only within this framework. - Privatization of the main telephone company (Albetelekom) remains a priority. - Governance and institutions: - Strengthening the rule of law is key for stability and economic growth. - Mid-term priorities: improving implementation and monitoring of policies and laws; strengthening institutional interaction; enhancing accountability; adopting instruments to motivate public functionaries; improving available means of technology. - Fight corruption at all levels of administration and complete reform of government decentralization. - Improve substantially the quality, extent, and timeliness of statistics. ### Poverty reduction outcomes and challenges - Notable improvements since 1998: - Percentage of population with per capita income below two dollars a day is now only 10.8 percent (it was 46.6 percent in 1998). - Infant mortality rate (per 1000 live births) is 18 (it was 27.6 in 1998). - To reach the MDG by 2015, substantial improvement is needed in the absolute poverty headcount rate, the rule of law, and control of corruption, as reported in the Poverty Reduction Strategy Report. ### Future Fund engagement - Given Albania’s protracted external financing needs, the proposed access is SDR 17.045 million (35 percent of quota) equally distributed between the PRGF and EFF. - The request for a blend of these two facilities reflects Albania's rapid income growth over the last decade. - Key reform areas: revenue administration, public debt management, financial market development, expenditure management, and civil service. *IMF staff report content provided in the source PDF.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr0654.pdf_