## _cr08270

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---

### Overview and strategic context
- The National Strategy for Development and Integration (NSDI) for 2007–13 succeeds the Poverty Reduction and Strategy Paper (PRSP) presented in January 2002.
- Strategic priorities: a commitment towards integration in the E.U. and NATO; the democratization of society; the consolidation of the rule of law; and the achievement of rapid and sustainable economic and social development.
- NSDI structure: based on thirty six sector and cross-cutting strategies and being integrated into the three-year Medium-Term Budget Program (MTBP).
- Strengths of the NSDI process:
  - strong government ownership;
  - a broader participatory process facilitating civil society participation;
  - a closer link between the NSDI, sector strategies and the MTBP;
  - an improved poverty diagnosis;
  - a comprehensive development strategy that focuses on results;
  - ambitious plans for monitoring the overall effectiveness of Albania’s public expenditures.
- Areas needing stronger emphasis or further work:
  - further stress the importance of a solid public administration founded on a rule-based civil service management system;
  - provide a candid assessment of whether current decentralization arrangements have led to improved efficiency and equity in local service delivery.

### Poverty diagnosis and monitoring
- Key outcomes from the 2005 Living Standard Measurement Survey:
  - headcount poverty declined from 25 percent to 18.5 percent between 2002 and 2005;
  - the gap between the richest and poorest areas declined;
  - inequality rose only modestly.
- Drivers of poverty reduction: sustained growth and migration (both internal and external).
- Remaining concerns and recommendations:
  - the gap between rural and urban areas has widened in absolute and relative terms;
  - family farms have low productivity and the means-tested income support program (Ndhima Ekonomike) has had only a modest impact in reducing poverty;
  - greater commitment to raising rural incomes and more effective design of social inclusion programs is needed to accelerate rural poverty reduction;
  - NSDI updates could more explicitly address emerging risks from ongoing increases in world food and energy prices and explain mitigation plans.
- Statistical and monitoring improvements:
  - completion of a first-ever Labor Force Survey and a Household Budget Survey with better coverage in 2007 should significantly improve knowledge of the labor market and poverty conditions;
  - recommendation for a more predictable resource commitment to the Institute of National Statistics (INSTAT) and adoption, financing and implementation of the statistical master plan.

### Macroeconomic policies and framework
- 2007 macroeconomic context and outcomes:
  - growth remained high at around 6 percent;
  - inflation was contained, although specific cost pressures pushed the inflation rate temporarily above the 2–4 percent target range;
  - net domestic borrowing in 2007 was limited to 1.8 percent of GDP;
  - public debt ratio declined to 54 percent of GDP, down from 57 percent in 2005.
- Other developments:
  - privatization receipts were used partly to finance public investment and partly to reduce debt;
  - private sector credit has continued to grow very rapidly; banking sector opened up to greater competition and foreign ownership.
- Policy assessments and risks:
  - macroeconomic projections in the NSDI could be strengthened by analytical work identifying main determinants of growth and discussing linkages between exports, growth, rising investment (including growing private credit) and the external account;
  - risks include deterioration of the financial position of the public electricity company KESH and accelerated public infrastructure spending.
- Fiscal concerns and numerical comparisons:
  - the expected fiscal deficit in 2008 of 7.9 percent of GDP (an increase of around 3.3 percentage points of GDP) is significantly in excess of the deficit in the current EFF-PRGF program (5.2 percent of GDP);
  - the NSDI assumes a project implementation rate considerably higher than observed in the past, making full execution of spending unlikely;
  - staffs recommend using the mid-year budget review to adjust if the actual budget deficit is at risk of exceeding 5.2 percent of GDP.
- Costing and medium-term budget alignment:
  - indicative costings currently exceed the authorities’ macroeconomic projections for the 2011–2013 period by around lek 30 billion or 10 percent of the projected available resources;
  - need to improve capacity to cost policies, prioritize more clearly, and address weak absorptive capacity and bottlenecks for capital spending execution.

### Public sector governance, accountability, and business environment
- Public investment and transparency:
  - introduction of the Integrated Planning System (IPS) expected to better align NSDI with MTBP and the annual budget;
  - critical importance of implementing the new computerized treasury system for greater transparency in public resource use;
  - need to strengthen institutional capacities for evaluation and prioritization of public investment projects within the MTBP.
- Civil service and public administration:
  - NSDI recognizes the need to build a professional public administration and civil service by attracting and retaining qualified and skilled staff.
  - Recommended emphases for future NSDI updates:
    - reinstate competitive and transparent recruitment and selection procedures;
    - reinvigorate due process protection;
    - accelerate development of performance-based civil service management practices.
  - Suggestion for gradual and prudent expansion of the coverage of the Law on Civil Servants (CSL) once there is full compliance for the narrow set of staff currently covered.
  - Staff urge reconsideration of proposed pay enhancements attached to postgraduate degrees and to devise less ad hoc and more fiscally sustainable means of adjusting the civil service salary structure.
- Business environment and property rights:
  - regulatory and administrative reforms have reduced the time for registering a business and removed unnecessary barriers in licensing, tax, customs, land and construction; a regulatory impact assessment system introduced for new reform measures.
  - Recommendations to maintain reform momentum, limit unfair practices, ensure market competition, and improve land tenure and security of property rights to spur domestic and foreign investments.
  - NSDI initiatives in land and property include restitution, self-financing of the Immovable Property Rights Office, and completion of property registration.
  - Recommended further attention in updates to:
    - contain high potential fiscal costs associated with restitution;
    - guard against potential financial stability risks if increased collateral fuels lending;
    - reduce time required to process land transactions;
    - support municipalities in developing and transparently enforcing land use plans and zoning to minimize unplanned construction and costs.

### Sectoral policies — Energy
- Causes and characteristics of the electricity crises since end-2006:
  - country-wide shortages negatively affecting business environment and livelihoods, with fiscal costs;
  - key causes identified: high losses in distribution system, dependency on internal hydroelectric generation, limited interconnection access to the region.
- Strategic priorities and recommendations:
  - NSDI presents an ambitious target for domestic electricity production by 2013;
  - recommendation to highlight need for safeguarding hydroelectric resources through a dam safety program.
- Institutional and regulatory framework:
  - government effort to establish an effective institutional and regulatory framework is commendable;
  - regulator must independently, correctly and transparently apply methodologies and set cost-recovery tariffs;
  - regional increases in electricity supply costs need reflection in tariffs to ensure sector financial viability and attract private capital.
- Long-term solution and privatization risks:
  - long-term solution: a well-regulated, private-sector-dominated and diversified power sector fully integrated in a liberalized Southeastern European market.
  - NSDI stresses privatization of distribution as early as 2008;
  - improved cash flow of KESH and an effective regulatory framework are critical for successful privatization;
  - NSDI should reflect risks for privatization from weakening financial position of KESH and maintain an orderly approach to planning and contracting private investment to minimize contingent liabilities.
- Recommendation for better reporting on donor and domestic stakeholder coordination in the energy sector.

### Sectoral policies — Improving key infrastructure
- Transport:
  - priority given to transport welcomed, but objectives may be overly ambitious and costly for the NSDI implementation period, posing fiscal and macroeconomic risks.
  - recommendation for greater focus on project identification and prioritization based on objective criteria, improved project management and cost control.
  - Albanian Railways: significant investments should be made only where positive net economic and social benefits exist.
- Water and sanitation:
  - NSDI emphasizes decentralization, utility management with some private sector participation, gradual phasing out of operating subsidies, and performance-based investment transfers from central government.
  - Staff recommendations:
    - establish stronger incentives for improved management of water utilities, notably through a performance-based system for allocating operating subsidies until elimination;
    - consider analytical work to assess need for a targeted subsidy to mitigate tariff increases on poor consumers;
    - continue transparent monitoring by the General Directorate of Water and Sanitation to guide investment transfers and development financing.

### Sectoral policies — Delivering social services
- Education:
  - NSDI articulates education’s role in economic growth, democracy and regional integration; addresses attainment, quality and equity especially at secondary and tertiary levels.
  - Selected performance indicators are pertinent.
  - Suggested additions for future NSDI updates:
    - consider role of local government in education provision;
    - reform technical and vocational education to strengthen labor market linkages and integrate with general secondary education;
    - highlight government plans to address challenges from the new Law on Higher Education, in line with the Higher Education Master Plan.
- Health:
  - NSDI highlights challenges and a coherent vision for improved access to basic health services, higher quality and increased efficiency.
  - Emphasis on reviewing health care and health financing legislation and ensuring transparency in the pharmaceutical sector.
  - Recommended specific measures for future updates:
    - consider a reduction in reliance on payroll tax contributions while ensuring predictability of health insurance financing;
    - gradually shift towards a population-based regional allocation of health sector funds;
    - use hospital/primary health care maps to rationalize and guide future investments in health facilities;
    - implement measures to reduce corruption in the health sector and increase transparency of the pharmaceutical sector.

### Social insurance and pension reform
- NSDI highlights weak collection of contributions and the stagnant formal labor market as determinants of the high dependency rate.
- Staffs recommend caution regarding the NSDI’s recommendation to move to a multipillar system for pensions, noting that in many other countries this has had a significant impact on the budget due to transition costs.
- Recommended focus for early stages of a pension reform strategy:
  - (i) improving the administration of the current system to generate cost savings;
  - (ii) changing the benefit system, by improving the links between contributions and benefits so as to raise revenues from the increased incentive to contribute.
- Expected policy sequence:
  - Improved administration and benefit linkage should generate fiscal space enabling the Government, in the future, to reduce contribution rates and stimulate growth in formal sector jobs.
  - Only at that future date should the government examine preconditions for introducing a funded pillar.
- Interim recommendation: minimize ad hoc increases in special pension benefits which do little to encourage participation.

### Social assistance and services
- NSDI states the need to improve the coverage and level of benefits in Albania’s social assistance—Ndhima Ekonomike.
- Staffs stress equal importance of improving targeting, as identified in the latest poverty assessment.
- Complementary actions recommended:
  - Improve survey-based instruments to measure and monitor poverty.
  - Address other subsidy programs (e.g., the electricity compensation scheme and proposed subsidies for water) within the social assistance strategy.
- On social services for vulnerable groups:
  - NSDI’s strategy is comprehensive.
  - Staffs recommend inclusion of a sound financing strategy for all residential and daily care services.
  - Strengthen capacity of local government units to undertake new tasks in a fiscally sustainable manner.

### Rural development and agriculture
- NSDI presents a comprehensive vision for rural development consistent with the EU approach.
- Identified structural constraints: land fragmentation, low productivity and competitiveness of agricultural production, shortage of off-farm income-earning opportunities, and weakness in rural social service delivery.
- Staffs agree that a simple and transparent system for providing investment assistance to farmers is critical and may help develop rural credit markets without distorting the market.
- Public resources for marketing agricultural products: emphasis may not be warranted given private sector engagement.
- Benefits noted for providing better secondary and vocational education to rural families to facilitate employment and income growth outside agriculture.

### Spatial planning, property rights, and tourism
- Spatial planning and property rights:
  - NSDI recognizes importance of spatial planning through an integrated, transparent, and participatory approach.
  - Development of regulatory plans approved by commune and municipal councils to guide local development is appropriate.
  - Staffs suggest NSDI could further clarify the central government’s role in spatial planning and coordination of sectoral planning with local efforts.
  - Staffs commend efforts to regularize property rights and encourage maintenance of full transparency and due process in issuance and enforcement of permits in line with approved regulatory plans.
- Tourism development:
  - Tourism development based on intrinsic, natural and cultural values is a key opportunity.
  - NSDI accurately describes sector challenges: inadequate infrastructure and solid waste management, insufficient control over physical developments.
  - For tourism to catalyze regional growth, the Government will need to establish:
    - (i) a strong regulatory environment for land use and physical developments;
    - (ii) strong coordination of private and public activities including training, marketing, and standard setting;
    - (iii) mechanisms for sharing benefits of tourism from national to local levels.
  - Staffs recommend highlighting these mechanisms in future NSDI revisions.

### Local government reforms
- NSDI correctly identifies required reforms in the system of local governments.
- NSDI highlights:
  - Stabilizing the formula for distributing intergovernmental transfers;
  - Setting controls over municipal borrowing;
  - Improving efficiency of investment grant allocation by limiting political discretion in project selection.
- Staffs note insufficient recognition of adverse impact of too much de-earmarking, which has resulted in under-funding of education and roads.
- Staffs recommend:
  - (i) enshrining rules governing level and distribution of transfers in permanent legislation;
  - (ii) tightening of municipal debt ceilings;
  - (iii) adopting more specific criteria for allocating competitive grants and providing sufficient technical resources for their evaluation.
- For education and health, recommendations may take the form of national sectoral investment plans; for small local investments, a more decentralized approach is warranted.

### Anti-corruption strategy
- NSDI’s anti-corruption elements are broad and resemble a general declaration of principles rather than a strategic framework.
- Staffs commend public education focus and coordination across government levels.
- Recommended improvements:
  - (i) an evaluation of the impact of past and ongoing governance and anti-corruption efforts;
  - (ii) a more succinct description of remaining problems;
  - (iii) a clear statement of immediate priorities and a road map for achieving results;
  - (iv) a framework for monitoring and evaluation.

### Implementation risks
- Identified implementation risks: political stalemate, macroeconomic vulnerabilities, and weak capacities.
- Political risk: stalemates, especially around local or national elections, can threaten NSDI progress.
- Macroeconomic risks:
  - Increased due to impending election year pressures and recurrent electricity shocks that can affect growth and external sustainability if energy sector reforms are not accelerated.
  - Exports remain heavily dependent on a few products and markets; export base needs expansion for long-term external sustainability.
- Capacity risks: weak administrative capacity across Albanian institutions.
- Mitigation recommendations:
  - Use external technical assistance under the IPS Trust Fund, while building mechanisms to ensure transfer of knowledge and retention of experienced and competent staff.
- Monitoring recommendations:
  - Authorities’ intention to publish annual progress reports with outcome-level indicators is commended, but staffs encourage revisiting some proposed indicators.
  - Concerns: many proposed monitoring indicators are sector output rather than outcome indicators; several lack baselines and annual and medium-term targets.
  - Staffs recommend revisiting indicators for:
    - (i) consistency with sectoral strategies;
    - (ii) suitability for measuring reforms’ impact in certain sectors (e.g., energy, public administration, higher education and rural development);
    - (iii) regular availability;
    - (iv) capacity to generate and monitor the indicators.
  - Strengthen monitoring role of sectoral advisory groups.

### Conclusions and priorities
- NSDI is a comprehensive and integrated medium-term strategy and a significant improvement over the previous PRSP; it was prepared through a participatory process.
- Key challenges for authorities to address:
  - Maintaining an appropriate macroeconomic framework that accounts for macroeconomic and fiscal risks arising from the transport and energy sectors.
  - Translating NSDI priorities into concrete and adequately costed expenditure plans that balance development needs with macroeconomic risks.
  - Significantly strengthening public spending efficiency through a measured approach to future public sector spending in transport consistent with the Albanian National Transport Plan.
  - Embracing public administration reform focused on improved compliance with the civil service law to ensure a more stable, capable and depoliticized staff (reduced turnover of qualified staff, transparent and competitive recruitment, respect of due process protection).
- Staffs look forward to an update of the NSDI and its Annual Progress Report, and hope future updates will:
  - (i) take into consideration the proposed recommendations in this JSAN;
  - (ii) identify realistic measurable targets;
  - (iii) evaluate performance transparently against these benchmarks.
- Executive Directors may wish to focus on:
  - a. Do Directors agree with the staffs’ proposed advice on the NSDI?
  - b. Do the Directors concur with the priority areas for implementation identified by the staffs?

*Source: _cr08270 - 22. The NSDI correctly highlights the key issues in social insurance, including the*

### 1. The Albanian authorities have prepared their poverty reduction strategy—the

### 1. The Albanian authorities have prepared their poverty reduction strategy—the

### Overview and strategic context
- The National Strategy for Development and Integration (NSDI) for 2007–13 succeeds the Poverty Reduction and Strategy Paper (PRSP) presented in January 2002.
- Strategic priorities of the NSDI: a commitment towards integration in the E.U. and NATO; the democratization of society; the consolidation of the rule of law; and the achievement of rapid and sustainable economic and social development.
- The NSDI is based on thirty six sector and cross-cutting strategies and is being integrated into the three-year Medium-Term Budget Program (MTBP) which identifies policy objectives as intermediate steps to the achievement of the NSDI goals.
- Strengths of the NSDI process:
  - strong government ownership;
  - a broader participatory process facilitating civil society participation;
  - a closer link between the NSDI, sector strategies and the MTBP;
  - an improved poverty diagnosis;
  - a comprehensive development strategy that focuses on results;
  - ambitious plans for monitoring the overall effectiveness of Albania’s public expenditures.
- Areas needing stronger emphasis or further work:
  - further stress the importance of a solid public administration founded on a rule-based civil service management system;
  - provide a candid assessment of whether current decentralization arrangements have led to improved efficiency and equity in local service delivery.

### Poverty diagnosis and monitoring
- Key outcomes from the 2005 Living Standard Measurement Survey:
  - headcount poverty declined from 25 percent to 18.5 percent between 2002 and 2005;
  - the gap between the richest and poorest areas declined;
  - inequality rose only modestly.
- Drivers of poverty reduction: sustained growth and migration (both internal and external).
- Remaining concerns and recommendations:
  - the gap between rural and urban areas has widened in absolute and relative terms;
  - family farms have low productivity and the means-tested income support program (Ndhima Ekonomike) has had only a modest impact in reducing poverty;
  - greater commitment to raising rural incomes and more effective design of social inclusion programs is needed to accelerate rural poverty reduction;
  - NSDI updates could more explicitly address emerging risks from ongoing increases in world food and energy prices and explain mitigation plans.
- Statistical and monitoring improvements:
  - completion of a first-ever Labor Force Survey and a Household Budget Survey with better coverage in 2007 should significantly improve knowledge of the labor market and poverty conditions;
  - recommendation for a more predictable resource commitment to the Institute of National Statistics (INSTAT) and adoption, financing and implementation of the statistical master plan.

### Macroeconomic policies and framework
- 2007 macroeconomic context and outcomes:
  - growth remained high at around 6 percent;
  - inflation was contained, although specific cost pressures pushed the inflation rate temporarily above the 2–4 percent target range;
  - net domestic borrowing in 2007 was limited to 1.8 percent of GDP;
  - public debt ratio declined to 54 percent of GDP, down from 57 percent in 2005.
- Other developments:
  - privatization receipts were used partly to finance public investment and partly to reduce debt;
  - private sector credit has continued to grow very rapidly; banking sector opened up to greater competition and foreign ownership.
- Policy assessments and risks:
  - macroeconomic projections in the NSDI could be strengthened by analytical work identifying main determinants of growth and discussing linkages between exports, growth, rising investment (including growing private credit) and the external account;
  - risks to the macroeconomic outlook include deterioration of the financial position of the public electricity company KESH and accelerated public infrastructure spending.
- Fiscal concerns and numerical comparisons:
  - the expected fiscal deficit in 2008 of 7.9 percent of GDP (an increase of around 3.3 percentage points of GDP) is significantly in excess of the deficit in the current EFF-PRGF program (5.2 percent of GDP);
  - the NSDI assumes a project implementation rate considerably higher than observed in the past, making full execution of spending unlikely;
  - staffs recommend using the mid-year budget review to adjust if the actual budget deficit is at risk of exceeding 5.2 percent of GDP.
- Costing and medium-term budget alignment:
  - indicative costings currently exceed the authorities’ macroeconomic projections for the 2011–2013 period by around lek 30 billion or 10 percent of the projected available resources;
  - need to improve capacity to cost policies, prioritize more clearly, and address weak absorptive capacity and bottlenecks for capital spending execution.

### Public sector governance, accountability, and business environment
- Public investment and transparency:
  - introduction of the Integrated Planning System (IPS) expected to better align NSDI with MTBP and the annual budget;
  - critical importance of implementing the new computerized treasury system for greater transparency in public resource use;
  - need to strengthen institutional capacities for evaluation and prioritization of public investment projects within the MTBP.
- Civil service and public administration:
  - NSDI recognizes the need to build a professional public administration and civil service by attracting and retaining qualified and skilled staff;
  - recommended emphases for future NSDI updates:
    - reinstate competitive and transparent recruitment and selection procedures;
    - reinvigorate due process protection;
    - accelerate development of performance-based civil service management practices.
  - suggestion for a gradual and prudent expansion of the coverage of the Law on Civil Servants (CSL) once there is full compliance for the narrow set of staff currently covered;
  - staff urge reconsideration of proposed pay enhancements attached to postgraduate degrees and to devise less ad hoc and more fiscally sustainable means of adjusting the civil service salary structure.
- Business environment and property rights:
  - regulatory and administrative reforms have reduced the time for registering a business and removed unnecessary barriers in licensing, tax, customs, land and construction; regulatory impact assessment system introduced for new reform measures;
  - recommendations to maintain reform momentum, limit unfair practices, ensure market competition, and improve land tenure and security of property rights to spur domestic and foreign investments.
  - NSDI initiatives in land and property include restitution, self-financing of the Immovable Property Rights Office, and completion of property registration.
  - recommended further attention in updates to:
    - contain high potential fiscal costs associated with restitution;
    - guard against potential financial stability risks if increased collateral fuels lending;
    - reduce time required to process land transactions;
    - support municipalities in developing and transparently enforcing land use plans and zoning to minimize unplanned construction and costs.

### Sectoral policies — Energy
- Causes and characteristics of the electricity crises since end-2006:
  - country-wide shortages negatively affecting business environment and livelihoods, with fiscal costs;
  - key causes identified: high losses in distribution system, dependency on internal hydroelectric generation, limited interconnection access to the region.
- Strategic priorities and recommendations:
  - NSDI presents an ambitious target for domestic electricity production by 2013;
  - recommendation to highlight need for safeguarding hydroelectric resources through a dam safety program.
  - institutional and regulatory framework:
    - government effort to establish an effective institutional and regulatory framework is commendable;
    - regulator must independently, correctly and transparently apply methodologies and set cost-recovery tariffs;
    - regional increases in electricity supply costs need reflection in tariffs to ensure sector financial viability and attract private capital.
  - long-term solution: a well-regulated, private-sector-dominated and diversified power sector fully integrated in a liberalized Southeastern European market.
  - privatization and fiscal risks:
    - NSDI stresses privatization of distribution as early as 2008;
    - improved cash flow of KESH and an effective regulatory framework are critical for successful privatization;
    - NSDI should reflect risks for privatization from weakening financial position of KESH and maintain an orderly approach to planning and contracting private investment to minimize contingent liabilities.
  - recommendation for better reporting on donor and domestic stakeholder coordination in the energy sector.

### Sectoral policies — Improving key infrastructure
- Transport:
  - priority given to transport welcomed, but objectives may be overly ambitious and costly for the NSDI implementation period, posing fiscal and macroeconomic risks.
  - recommendation for greater focus on project identification and prioritization based on objective criteria, improved project management and cost control.
  - Albanian Railways: significant investments should be made only where positive net economic and social benefits exist.
- Water and sanitation:
  - NSDI emphasizes decentralization, utility management with some private sector participation, gradual phasing out of operating subsidies, and performance-based investment transfers from central government.
  - staff recommendations:
    - establish stronger incentives for improved management of water utilities, notably through a performance-based system for allocating operating subsidies until elimination;
    - consider analytical work to assess need for a targeted subsidy to mitigate tariff increases on poor consumers;
    - continue transparent monitoring by the General Directorate of Water and Sanitation to guide investment transfers and development financing.

### Sectoral policies — Delivering social services
- Education:
  - NSDI articulates education’s role in economic growth, democracy and regional integration; addresses attainment, quality and equity especially at secondary and tertiary levels.
  - selected performance indicators are pertinent.
  - suggested additions for future NSDI updates:
    - consider role of local government in education provision;
    - reform technical and vocational education to strengthen labor market linkages and integrate with general secondary education;
    - highlight government plans to address challenges from the new Law on Higher Education, in line with the Higher Education Master Plan.
- Health:
  - NSDI highlights challenges and a coherent vision for improved access to basic health services, higher quality and increased efficiency.
  - emphasis on reviewing health care and health financing legislation and ensuring transparency in the pharmaceutical sector.
  - recommended specific measures for future updates:
    - consider a reduction in reliance on payroll tax contributions while ensuring predictability of health insurance financing;
    - gradually shift towards a population-based regional allocation of health sector funds;
    - use hospital/primary health care maps to rationalize and guide future investments in health facilities;
    - implement measures to reduce corruption in the health sector and increase transparency of the pharmaceutical sector.

*IMF staff report content as presented in the source.*

### 22. The NSDI correctly highlights the key issues in social insurance, including the

### 22. The NSDI correctly highlights the key issues in social insurance, including the

### Social insurance and pension reform
- NSDI highlights weak collection of contributions and the stagnant formal labor market as determinants of the high dependency rate.
- Staffs recommend caution regarding the NSDI’s recommendation to move to a multipillar system for pensions, noting that in many other countries this has had a significant impact on the budget due to transition costs.
- Recommended focus for early stages of a pension reform strategy:
  - (i) improving the administration of the current system to generate cost savings;
  - (ii) changing the benefit system, by improving the links between contributions and benefits so as to raise revenues from the increased incentive to contribute.
- Expected policy sequence:
  - Improved administration and benefit linkage should generate fiscal space enabling the Government, in the future, to reduce contribution rates and stimulate growth in formal sector jobs.
  - Only at that future date should the government examine preconditions for introducing a funded pillar.
- Interim recommendation: minimize ad hoc increases in special pension benefits which do little to encourage participation.

### Social assistance and services
- NSDI states the need to improve the coverage and level of benefits in Albania’s social assistance—Ndhima Ekonomike.
- Staffs stress equal importance of improving targeting, as identified in the latest poverty assessment.
- Complementary actions recommended:
  - Improve survey-based instruments to measure and monitor poverty.
  - Address other subsidy programs (e.g., the electricity compensation scheme and proposed subsidies for water) within the social assistance strategy.
- On social services for vulnerable groups:
  - The NSDI’s strategy is comprehensive.
  - Staffs recommend inclusion of a sound financing strategy for all residential and daily care services.
  - Strengthen capacity of local government units to undertake new tasks in a fiscally sustainable manner.

### Rural development and agriculture
- NSDI presents a comprehensive vision for rural development consistent with the EU approach.
- Identified structural constraints: land fragmentation, low productivity and competitiveness of agricultural production, shortage of off-farm income-earning opportunities, and weakness in rural social service delivery.
- Staffs agree that a simple and transparent system for providing investment assistance to farmers is critical and may help develop rural credit markets without distorting the market.
- Public resources for marketing agricultural products: emphasis may not be warranted given private sector engagement.
- Benefits noted for providing better secondary and vocational education to rural families to facilitate employment and income growth outside agriculture.

### Spatial planning and property rights
- NSDI recognizes importance of spatial planning through an integrated, transparent, and participatory approach.
- Development of regulatory plans approved by commune and municipal councils to guide local development is appropriate.
- Staffs suggest NSDI could further clarify the central government’s role in spatial planning and coordination of sectoral planning with local efforts.
- Staffs commend efforts to regularize property rights and encourage maintenance of full transparency and due process in issuance and enforcement of permits in line with approved regulatory plans.

### Tourism development
- Tourism development based on intrinsic, natural and cultural values is a key opportunity.
- NSDI accurately describes sector challenges: inadequate infrastructure and solid waste management, insufficient control over physical developments.
- For tourism to catalyze regional growth, the Government will need to establish:
  - (i) a strong regulatory environment for land use and physical developments;
  - (ii) strong coordination of private and public activities including training, marketing, and standard setting;
  - (iii) mechanisms for sharing benefits of tourism from national to local levels.
- Staffs recommend highlighting these mechanisms in future NSDI revisions.

### Local government reforms
- NSDI correctly identifies required reforms in the system of local governments.
- NSDI highlights:
  - Stabilizing the formula for distributing intergovernmental transfers;
  - Setting controls over municipal borrowing;
  - Improving efficiency of investment grant allocation by limiting political discretion in project selection.
- Staffs note insufficient recognition of adverse impact of too much de-earmarking, which has resulted in under-funding of education and roads.
- Staffs recommend:
  - (i) enshrining rules governing level and distribution of transfers in permanent legislation;
  - (ii) tightening of municipal debt ceilings;
  - (iii) adopting more specific criteria for allocating competitive grants and providing sufficient technical resources for their evaluation.
- For education and health, recommendations may take the form of national sectoral investment plans; for small local investments, a more decentralized approach is warranted.

### Anti-corruption strategy
- NSDI’s anti-corruption elements are broad and resemble a general declaration of principles rather than a strategic framework.
- Staffs commend public education focus and coordination across government levels.
- Recommended improvements to anti-corruption strategy and its NSDI translation:
  - (i) an evaluation of the impact of past and ongoing governance and anti-corruption efforts;
  - (ii) a more succinct description of remaining problems;
  - (iii) a clear statement of immediate priorities and a road map for achieving results;
  - (iv) a framework for monitoring and evaluation.

### Implementation risks (paragraphs 29–30)
- Identified implementation risks: political stalemate, macroeconomic vulnerabilities, and weak capacities.
- Political risk: stalemates, especially around local or national elections, can threaten NSDI progress.
- Macroeconomic risks:
  - Increased due to impending election year pressures and recurrent electricity shocks that can affect growth and external sustainability if energy sector reforms are not accelerated.
  - Exports remain heavily dependent on a few products and markets; export base needs expansion for long-term external sustainability.
- Capacity risks: weak administrative capacity across Albanian institutions.
- Mitigation recommendations:
  - Use external technical assistance under the IPS Trust Fund, while building mechanisms to ensure transfer of knowledge and retention of experienced and competent staff.
- Monitoring recommendations:
  - Authorities’ intention to publish annual progress reports with outcome-level indicators is commended, but staffs encourage revisiting some proposed indicators.
  - Concerns: many proposed monitoring indicators are sector output rather than outcome indicators; several lack baselines and annual and medium-term targets.
  - Staffs recommend revisiting indicators for:
    - (i) consistency with sectoral strategies;
    - (ii) suitability for measuring reforms’ impact in certain sectors (e.g., energy, public administration, higher education and rural development);
    - (iii) regular availability;
    - (iv) capacity to generate and monitor the indicators.
  - Strengthen monitoring role of sectoral advisory groups.

### Conclusions and priorities (paragraphs 31–33)
- NSDI is a comprehensive and integrated medium-term strategy and a significant improvement over the previous PRSP; it was prepared through a participatory process.
- Key challenges for authorities to address:
  - Maintaining an appropriate macroeconomic framework that accounts for macroeconomic and fiscal risks arising from the transport and energy sectors.
  - Translating NSDI priorities into concrete and adequately costed expenditure plans that balance development needs with macroeconomic risks.
  - Significantly strengthening public spending efficiency through a measured approach to future public sector spending in transport consistent with the Albanian National Transport Plan.
  - Embracing public administration reform focused on improved compliance with the civil service law to ensure a more stable, capable and depoliticized staff (reduced turnover of qualified staff, transparent and competitive recruitment, respect of due process protection).
- Staffs look forward to an update of the NSDI and its Annual Progress Report, and hope future updates will:
  - (i) take into consideration the proposed recommendations in this JSAN;
  - (ii) identify realistic measurable targets;
  - (iii) evaluate performance transparently against these benchmarks.
- Executive Directors may wish to focus on:
  - a. Do Directors agree with the staffs’ proposed advice on the NSDI?
  - b. Do the Directors concur with the priority areas for implementation identified by the staffs?

*Source: _cr08270 - 22. The NSDI correctly highlights the key issues in social insurance, including the*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08270.pdf_