## _cr16289

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### Output and labor market developments
- GDP growth:
  - 2015: 2.6 percent
  - 2016:Q1: 3 percent
- Growth drivers:
  - Momentum driven by large energy-related FDI projects, offsetting declining oil production.
  - High-frequency indicators in 2016 point to improved consumption and investment demand, supported by accommodative monetary policy, lower fuel prices, and job creation.
- Unemployment:
  - end-2015: 17.7 percent
  - 2016:Q1: 16.9 percent
  - Notes: high due to structural unemployment, negative output gap, and new labor market entrants.

### Price and monetary developments
- Inflation and policy rates:
  - Inflation described as subdued with headline and core inflation low; CPI recovered to 1.2 percent in June 2016 (as reported).
  - Policy rate at 1¼ percent (following cumulative 50 bps rate cuts in April and May).
  - BoA target for medium-term inflation: 3 percent.
  - Monetary stance: accommodative with room for further conventional easing; caution on negative remuneration of required euro reserves and exchange rate volatility.

### External sector and reserves
- Current account and trade:
  - 2015: trade deficit narrowed temporarily to 11 percent of GDP (one-off reduction in electricity imports and strong tourism receipts).
  - 2016:Q1: current account deficit widened mainly due to strong import-intensive FDI.
  - Projected current account deficit: around 13 percent of GDP in 2016 due to imports for Trans Adriatic Pipeline and Statkraft/Devoll hydropower projects.
- Remittances and financing:
  - 2015 remittances: 5.7 percent of GDP.
  - Three quarters of the 2015 current account deficit financed by FDI inflows.
  - Errors and omissions around 2–3 percent of GDP, likely reflecting unrecorded private remittances.
- Reserves:
  - Reserves remain above six months of imports in 2016:Q1; expected to decline marginally to around 5.5 months of imports because of significant amortization of foreign currency-denominated debt by government and SOEs.

### Fiscal performance and public finances
- Near-term fiscal performance (first four months of 2016 / end-April 2016):
  - VAT and local taxes fell short of program targets; income tax, excises, and social contributions performed well.
  - End-April fiscal targets met with comfortable margins due to broad-based expenditure underexecution.
  - Wage bill lower than expected due to civil service vacancies.
  - Capital and local expenditures short by 0.3 percent of GDP respectively.
  - Primary balance and primary expenditure performance criteria for end-April 2016 met with margins of around one percent of GDP.
- Triannual General Government Operations (selected series, values reported in source):
  - Total revenue and grants: 116.1; 236.4; 366.6; 121.7; 248.5; 377.5; 129.8; 129.4
  - Tax revenue: 103.7; 214.7; 335.8; 106.2; 223.5; 340.6; 118.7; 117.6
  - Non-tax revenue: 9.0; 14.8; 20.7; 13.0; 19.4; 25.7; 8.0; 8.4
  - Grants: 3.5; 6.9; 10.1; 2.6; 5.5; 11.2; 3.1; 3.3
  - Total expenditure: 126.6; 273.0; 448.6; 130.8; 271.9; 443.0; 132.5; 117.5
  - Primary expenditure: 118.9; 247.1; 414.9; 123.2; 257.5; 425.4; 120.9; 105.4
  - Capital expenditure: 11.5; 26.9; 60.5; 14.2; 28.6; 62.6; 15.3; 11.4
  - Policy net lending: 1.1; 2.6; 5.9; 1.8; 3.3; 7.3; 1.0; 1.3
  - Overall balance: -10.5; -36.6; -82.1; -9.1; -23.5; -65.5; -2.7; 11.8
  - Financing (total): 10.5; 36.6; 82.2; 9.1; 23.5; 65.5; 2.7; -11.8
  - Financing composition (selected): Domestic: 8.4; 3.7; 47.5; 3.2; -22.6; -5.5; -4.3; -17.4; Foreign: 1.7; 31.8; 34.3; 5.9; 46.1; 71.0; 6.9; 5.6
- Fiscal targets and medium-term goals:
  - Authorities committed to a primary surplus target of 0.2 percent of GDP in 2016 (adjusted to allow partial spending of privatization proceeds of 0.1 percent of GDP).
  - Public debt: over 70 percent of GDP (end-2015 73 percent); aim to reduce to around 60 percent of GDP in 2019.
  - Gross financing needs around 23 percent of GDP in 2016.
  - Measures of around 1 percent of GDP annually required under baseline to meet debt goal.

### Financial sector and NPLs
- Private sector credit and NPLs:
  - Credit to private sector declined since early 2015; adjusted credit growth (removing mandatory write-offs) 2.6 percent in March 2016, year-on-year.
  - NPLs: peaked at 25 percent post-crisis; 19.5 percent of all loans in May 2016 (other series report 20 percent at end-April 2016 and various Mar-16 readings of 18.2; 19.3; 20.6; 20.9).
- Banking system health (2016:Q1 indicators):
  - System-wide capitalization: 16 percent of risk-weighted assets.
  - Liquid assets: around 40 percent of short-term liabilities.
  - Exposure to sovereign bonds: 24 percent of total assets.
  - Profitability declined in 2016:Q1 due to one-off provisioning after two large borrowers bankruptcies.
- Macroprudential and regulatory stance:
  - Authorities committed to repeal by end-2016 temporary changes to capital requirements designed to encourage moderate credit growth.
  - To contain euroization risks, authorities will gradually unwind lower risk weights on Albanian government securities issued in a foreign currency.
  - Crisis management: expand deposit insurance and align bank resolution framework with EU’s Bank Recovery and Resolution Directive.

### Program performance, conditionality, and structural benchmarks
- Overall program status:
  - All performance criteria met with comfortable margins at end-April 2016.
  - Missed: two out of four indicative targets (distribution losses; accumulation of central government domestic arrears missed by 0.15 percent of GDP).
  - Remedial actions for arrears: authorities repaid almost all accumulated arrears except those on pending court decisions; MoF issued order restricting funding of projects not in MTBF as a prior action; stricter AGFIS controls introduced for Albanian Roads Authority.
- Structural benchmarks (SBs) — summary status:
  - Of nine SBs reported at one point: three met on time, three implemented with delays, three missed (two proposed to be rescheduled).
  - Selected met SBs: Roll-out of AGFIS to 15 budget institutions; submission of new Bankruptcy Law to Parliament; repayment action lowering arrears below 1 billion lek (except court decisions); adoption of function-based GDT HQ implementation plan; restructuring of Large Taxpayer Office (implemented with delay).
  - Rescheduled or delayed SBs include: full staffing of fiscal risks unit at MoF (rescheduled to end-Sep. 2016), removal of 35 kV customers from regulated tariff (rescheduled to end-Sep. 2016), publication timelines for quarterly financials and arrears surveys.

### Medium-term outlook, projections, and balance of risks
- Growth and inflation projections (staff baseline as reported):
  - GDP growth: 2016: 3.4 percent; 2017: 3.8 percent (elsewhere table shows 2017 Prog.: 3.4; 2018 Prog.: 3.8; 2019 Prog.: 4.1).
  - Inflation projections revised down: 2016: 1.0 percent (revised from 1.9 percent); 2017: 2.2 percent (revised from 2.4 percent).
  - BoA’s medium-term inflation target reached in 2018–19: 3 percent (expected).
- Medium-term external outlook:
  - Growth expected to rise to just over 4 percent over the medium term (source text).
  - Current account deficit expected to narrow over the medium term as energy-related imports taper and exports/ tourism pick up.
  - Reserve cover expected to stabilize around 4–4½ months of imports by 2020–21.
  - Energy-imports peak estimated around 4 percent of GDP in 2016, gradually tapering off.
- Balance of risks:
  - Overall balance of risks on the downside.
  - Downside drivers: spillovers from weakening EU (Greece and Italy), renewed slide in oil prices, erratic rainfall affecting electricity generation, slippages in structural reforms (including corruption and organized crime).
  - Upside scenarios: improved confidence from judicial reform and stronger FDI spillovers.

### Policy recommendations and planned reforms (selected)
- Fiscal policy:
  - Persevere with fiscal consolidation; achieve measures of around 1 percent of GDP annually, primarily revenue-based through broadening tax base and improving compliance.
  - Save any permanent budget overperformance in 2016 to ease 2017 consolidation.
  - Avoid granting further tax exemptions or preferential rates without IMF consultation or compensatory measures.
  - Any large unbudgeted windfalls from disputed tax payments not to be counted as revenue until disputes resolved.
- Revenue administration and tax policy:
  - Implement GDT reforms: function-based HQ, Large Taxpayer Office sector specialization, staff Risk Management Unit by end-Sep. 2016, phase in modern compliance risk management.
  - Introduce valuation-based property tax by end-2017: design valuation methodology and draft legislation by end-Sep. 2016; Parliament approval by end-2016 (modified SB); pilot in Tirana in 2017.
  - Prior action: approved function-based HQ restructuring and LTO restructuring implemented.
- Public financial management and arrears prevention:
  - Strengthen MTBF, public investment management, and project appraisal; operationalize public investment management unit in MoF by end-Sep. 2016.
  - Publish triannual central government arrears reports and quarterly local government arrears surveys; local governments to prepare action plans by end-Sep. 2016 covering at least 95 percent of regular bills at end-2015.
  - Operationalize multi-year commitment registry by end-Sep. 2016.
- Financial sector and NPL resolution:
  - Speed approval and implementation of new Bankruptcy Law and Private Bailiffs Law; amendments to Civil Procedure Code to be submitted by end-Sep. 2016.
  - Adopt measures to accelerate NPL reduction including out-of-court restructuring; require banks to grant loans based on companies’ fiscal declarations starting January 2018.
  - Repeal temporary capital requirement changes by end-2016; gradually roll back reduced risk weights on foreign-currency Albanian government securities by 2021.
- Electricity sector reforms:
  - Gradually unwind public support for the sector by 2020; reduce distribution losses from just under 30 percent (first five months of 2016) to 14 percent by 2019.
  - Remove medium-voltage customers from regulated tariffs per schedule: 35 kV rescheduled to end-Sep. 2016; 20 kV by end-2016 (SBs); full movement to end-2018 increases deregulated consumption from 13 to 33 percent.
  - Strengthen corporate governance, publish quarterly financial statements for KESh, OST, and OShEE, and monitor investment plans monthly.

### Program financing, Fund obligations, and debt projections
- Donor and multilateral financing (reported expectations):
  - EBRD loan expected: €118 million in 2016 to finance restructuring of electricity sector debt held by domestic banks.
  - EU: €15–20 million annually over 2016–18 in grants for balance of payments support linked to PFM reform strategy.
  - World Bank development policy loan expected: $100 million for budget support in 2017.
- Fund exposures and debt service:
  - By end of Extended Arrangement in 2017, Fund credit outstanding projected at 3.2 percent of GDP, or 13.5 percent of gross reserves.
  - Debt service to the Fund expected to peak in 2021 at around 0.4 percent of GDP and less than 3 percent of international reserves.
  - External debt trajectory: peak at 42.4 percent of GDP in 2017, declining to 37.2 percent of GDP by 2021.
  - External public debt falling from 36.1 to 30.2 percent of GDP over projection period.

### Program monitoring, conditionality adjustments, and safeguards
- Modifications supported by staff:
  - Change test date for SB and indicative target on central government arrears accumulation to end-October 2016 (from end-November).
  - Reschedule SBs on staffing fiscal risks unit and removal of 35 kV customers to September 2016; modify SB on valuation-based property tax to reflect updated roadmap.
  - Marginal adjustments to November 2016 PCs on primary balance, primary expenditure, and NIR PC in line with updated outlook.
- Reporting and program parameters (selected):
  - Program exchange rates and gold price parameters: lek 140.25 = €1; lek 103.17 = $1; lek 158.05 = SDR 1; gold price €920.18 = 1 oz.
  - BoA data reporting lags: NIR lag no more than 45 days for December test dates; no more than 15 days for other test dates.
  - MoF primary modified cash balance: lag no more than 60 days after December test dates; no more than 30 days after other test dates.
  - MoF consolidated arrears survey to be sent to Fund with a lag no more than 75 days after each test date.

### Staff appraisal and recommendation
- Staff view:
  - Economic recovery strengthening but downside risks persist.
  - Authorities should persevere with fiscal consolidation, safeguard financial stability, and implement structural reforms critical for improving the business climate, including strengthening the judiciary and addressing corruption.
  - Recommended focus: broadening the tax base, improving tax compliance and administration, strengthening MTBF credibility, preventing arrears recurrence, and accelerating NPL resolution.
- Staff recommendation:
  - Support completion of the Eighth Review under the Extended Arrangement and support authorities’ request for modification of performance criteria.

*Source: IMF staff report excerpt — "1. Output and Growth Developments," Appendix I, and related chapters (content unit _cr16289).*

### 1. Output and Growth Developments ______________________________________________________________ 5

### 1. Output and Growth Developments

### Context
- Albania has made significant strides in strengthening its economy over the past few years.
- Economic growth is accelerating and public debt has started to decline from its peak in 2015.
- Supported by a strong majority in Parliament, the government advanced structural reforms in the power sector, public pensions, and bankruptcy reform.
- Parliament unanimously approved a judicial reform package, removing a key obstacle to opening accession negotiations with the European Union.
- Main near-term policy priorities: further lower fiscal vulnerabilities, reduce nonperforming loans in the banking sector, and rapidly implement structural reforms to achieve robust, sustainable investment-led growth.
- The program is set to expire in February 2017 and provides an anchor for policy implementation ahead of mid-2017 elections.

### Recent developments — output and labor market
- GDP growth:
  - 2015: 2.6 percent
  - 2016:Q1: 3 percent
- Growth momentum driven by large energy-related FDI projects, offsetting declining oil production.
- High-frequency indicators for 2016 suggest improvement in consumption and investment demand, supported by accommodative monetary policy, lower fuel prices, and job creation.
- Unemployment:
  - end-2015: 17.7 percent
  - 2016:Q1: 16.9 percent
  - Notes: high due to structural unemployment, negative output gap, and new labor market entrants.

### Price developments
- Inflation drivers and status:
  - Headline inflation and components shown in Figure 2 (Food, Fuels, Others).
  - Core inflation and lek/euro exchange rate series displayed; data indicate subdued inflationary pressures.
- Interest rates:
  - Policy rate, Lek lending rate, Deposit rate, and ECB refinancing rate plotted; monetary easing maintained.

### External developments
- Current account and trade:
  - One-off reduction in electricity imports and strong tourism receipts narrowed trade deficit temporarily in 2015 to 11 percent of GDP, despite reduced oil exports.
  - 2016:Q1: current account deficit widened mainly due to strong import-intensive FDI.
  - Recorded current account deficit overstates external imbalances because of sizable errors and omissions (around 2–3 percent of GDP), likely unrecorded private remittances.
- Remittances:
  - 2015: 5.7 percent of GDP; broadly stable despite weak growth in source countries (Greece and Italy).
- Financing:
  - Three quarters of the current account deficit in 2015 was financed by FDI inflows.
  - Financial outflows from amortization of government foreign currency debt and bank placements abroad led to a marginal decline in international reserves in 2016:Q1, but reserves remain above six months of imports.
- Exports and imports contributions: sectoral contributions shown in Figure 3 (Machinery, equipment, spare parts; Construction materials and metals; Textiles and footwear; etc.).

### Fiscal developments
- Revenues (first four months of 2016):
  - VAT fell short of program targets, likely reflecting low inflation.
  - Local taxes fell short, highlighting revenue mobilization challenges for new local government units.
  - Income tax, excises, and social contributions performed well and nearly fully offset shortfalls.
  - Authorities’ campaign against tax evasion/noncompliance may be yielding results—number of social security contributors and newly registered or reclassified VAT companies increased.
  - Revenue numbers exclude unbudgeted windfalls due to disputed tax payments from a large foreign company.
- Fiscal performance (end-April 2016):
  - End-April fiscal targets met with comfortable margins due to broad-based expenditure underexecution.
  - Wage bill lower than expected due to persistent civil service vacancies.
  - Capital and local expenditures short by 0.3 percent of GDP respectively, reflecting public investment project management weaknesses.
  - Social spending below budget due to seasonal patterns and improved targeting.
  - Primary balance and primary expenditure performance criteria for end-April 2016 met with margins of around one percent of GDP.
- Triannual General Government Operations (selected figures from text table):
  - Total revenue and grants: 116.1; 236.4; 366.6; 121.7; 248.5; 377.5; 129.8; 129.4 (units/background in table)
  - Tax revenue: 103.7; 214.7; 335.8; 106.2; 223.5; 340.6; 118.7; 117.6
  - Non-tax revenue: 9.0; 14.8; 20.7; 13.0; 19.4; 25.7; 8.0; 8.4
  - Grants: 3.5; 6.9; 10.1; 2.6; 5.5; 11.2; 3.1; 3.3
  - Total expenditure: 126.6; 273.0; 448.6; 130.8; 271.9; 443.0; 132.5; 117.5
  - Primary expenditure: 118.9; 247.1; 414.9; 123.2; 257.5; 425.4; 120.9; 105.4
  - Capital expenditure: 11.5; 26.9; 60.5; 14.2; 28.6; 62.6; 15.3; 11.4
  - Policy net lending: 1.1; 2.6; 5.9; 1.8; 3.3; 7.3; 1.0; 1.3
  - Overall balance: -10.5; -36.6; -82.1; -9.1; -23.5; -65.5; -2.7; 11.8
  - Financing (total): 10.5; 36.6; 82.2; 9.1; 23.5; 65.5; 2.7; -11.8
  - Financing composition (selected): Domestic: 8.4; 3.7; 47.5; 3.2; -22.6; -5.5; -4.3; -17.4; Foreign: 1.7; 31.8; 34.3; 5.9; 46.1; 71.0; 6.9; 5.6
  - Percent of GDP series also provided in table (e.g., Total revenue and grants: 8.3; 17.0; 26.3; 8.4; 17.2; 26.2; 8.5; 8.6; Total expenditure: 9.1; 19.6; 32.2; 9.1; 18.8; 30.7; 8.7; 7.8).
- Key fiscal indicators (Figure 4): overall balance, primary balance (excl. arrears clearance), public debt (RHS), non-grant revenue (RHS), primary expenditure (excl. arrears clearance; RHS).
- Government bond yields and expenditure deviations from program targets are shown in Figure 4.

### Financial developments
- Private sector credit:
  - Credit to private sector has declined since early 2015; data affected by regulation mandating write-offs of loans that have spent three years in the “loss” category.
  - Adjusted credit growth (removing write-offs): 2.6 percent in March 2016, year-on-year.
  - Factors deterring lending: difficulties with contract enforcement and collateral execution in courts; significant NPL overhang.
  - NPLs: peaked at 25 percent post-crisis; 19.5 percent of all loans in May 2016.
- Banking system health:
  - System-wide capitalization: 16 percent of risk-weighted assets in 2016:Q1 (exceeds regulatory minima).
  - Liquid assets: around 40 percent of short-term liabilities.
  - Profitability declined in 2016:Q1 due to one-off provisioning following bankruptcy of two large borrowers.
  - Exposure to sovereign bonds remains high at 24 percent of total assets.
  - Regulatory capital and liquidity series shown in Figure 5 (Loan-to-deposit ratio; Ratio of liquid assets to short term liabilities; NPLs; Deposits and loans growth).

### Program performance
- Overall program status:
  - All performance criteria met with comfortable margins.
  - Two out of four indicative targets were missed:
    - Indicative target on distribution losses in the electricity sector missed due to delays in infrastructure investment; authorities remain determined to meet end-2016 target.
    - Indicative target on accumulation of central government domestic arrears missed by 0.15 percent of GDP, mostly due to road construction projects and court decisions on layoffs and expropriations.
  - Remedial actions for central government arrears:
    - Authorities repaid almost all accumulated arrears except those on pending court decisions.
    - Ministry of Finance issued an order ensuring that investment projects not in the MTBF can only be funded with explicit approval of the Strategic Planning Committee and authorized continuation of a specified list of projects accommodated in the MTBF (prior action).
    - Authorities will implement stricter internal controls in treasury IT system (AGFIS) at pre-commitment phase for Albanian Roads Authority.
  - Inflation Consultation Clause: lower outer band was missed; an inflation consultation was completed at time of Seventh Review under the Extended Arrangement.
  - Structural benchmarks (SBs): Of nine SBs, three met on time, three implemented with delays, three missed (two proposed to be rescheduled).
    - Delays and causes: reporting framework weaknesses delayed first quarterly survey of local government arrears; recruitment problems postponed full staffing of new fiscal risks unit at MoF until September; publication of quarterly financial statements of state-owned electricity companies delayed by one week; removal of 35 kV consumers from regulated tariff system postponed to September due to infrastructure and supply contract delays; restructuring of Large Taxpayer Office postponed to early August; verification delays of Regional Development Fund arrears held up publication of central government arrears survey until late July.

### Policy discussions — Outlook and risks
- Growth and inflation projections:
  - GDP growth projections unchanged: 3.4 percent for 2016 and 3.8 percent for 2017.
  - Growth supported by large energy-related FDI projects and gradual recovery of domestic demand.
  - Inflation projections revised down:
    - 2016: 1.0 percent (revised from 1.9 percent in the Seventh Review)
    - 2017: 2.2 percent (revised from 2.4 percent in the Seventh Review)
    - Reason: persistent negative output gap, weak imported inflation, and negative supply-side shocks earlier in the year; inflation expected to rise in second half of 2016 as oil and food prices recover.
- Current account and reserves outlook:
  - Current account deficit expected to increase in 2016–17 with ramp-up in large FDI-financed energy projects.
  - Current account deficit projected around 13 percent of GDP in 2016 due to increased imports for Trans Adriatic Pipeline and Statkraft/Devoll hydropower projects.
  - Significant amortization of foreign currency-denominated debt by government and SOEs expected to marginally reduce gross international reserves to around 5.5 months of imports.

*Source: IMF staff report excerpt — "1. Output and Growth Developments."*

### 11. The medium-term outlook remains favorable under the baseline. Growth is expected to

### 11. The medium-term outlook remains favorable under the baseline. Growth is expected to

### Medium-term growth and external outlook
- Growth is expected to rise to just over 4 percent over the medium term, supported by:
  - a flexible labor market,
  - a pickup in investment,
  - a boost to investor confidence as Albania implements reforms to improve the business climate and advances through the EU accession process.
- Inflation:
  - Expected to pick up gradually as domestic demand recovers and the output gap narrows,
  - Reaches BoA’s target of 3 percent in 2018–19.
- Current account and external financing:
  - The current account deficit will narrow over the medium term as large energy-related imports tail off and energy and tourism exports pick up while remittances gradually decline.
  - External financing will continue to be dominated by FDI and official financing.
  - Reserve cover is expected to gradually stabilize at around 4–4½ months of imports by 2020–21.
- Energy-imports note:
  - Imports related to large energy projects are estimated to peak at around 4 percent of GDP in 2016 and gradually taper off over the medium term.

### Balance of risks to the outlook
- Overall balance of risks is on the downside.
- Downside risk drivers:
  - Spillovers from a weakening EU (particularly Greece and Italy) could affect Albania through trade, remittances, FDI, and test fiscal adjustment and structural reforms.
  - A renewed slide in oil prices could damage fiscal revenues and growth by forcing scale-backs in investment and production in the domestic oil sector.
  - Erratic rainfall could reduce electricity generation, causing power shortages that damage growth and create quasi-fiscal risks from expensive electricity imports.
  - Slippages in structural reforms (including on corruption and organized crime) could erode confidence and investment.
- Upside scenarios:
  - Improved confidence after the judicial reform package and stronger spillovers from FDI projects could lead to higher investment financed by increased donor support and a recovery in credit flows.

### Ensuring fiscal sustainability and implementing structural fiscal reforms
- Fiscal targets and stance:
  - Authorities committed to a primary surplus target of 0.2 percent of GDP in 2016.
  - The primary surplus target has been adjusted to allow partial spending of privatization proceeds (0.1 percent of GDP) in 2016.
- Fiscal risks and buffers:
  - Revenues from oil-related royalties, VAT, and customs are vulnerable to lower oil prices.
  - Electricity sector reform and anti-evasion measures show results, but the approaching general election in mid-2017 might weaken discipline.
  - Tax administration capacity is limited; revised budget maintains buffers and reallocates resources to capital expenditure while securing recurrent savings.
  - Authorities agreed to save any permanent budget overperformance in 2016 to ease 2017 consolidation.
- Debt dynamics and consolidation needs:
  - Public debt level is over 70 percent of GDP.
  - Gross financing needs are around 23 percent of GDP in 2016.
  - Authorities aim to reduce public debt to around 60 percent of GDP in 2019.
  - Under the baseline, achieving this requires measures of around 1 percent of GDP annually.
  - Given government size of 25-30 percent of GDP and spending needs, measures should be primarily revenue-based focused on broadening the tax base and improving tax compliance.
  - Under this scenario, the overall general government balance is projected to decline to near zero in 2019, significantly below the targeted deficit of around 2½ percent of GDP in 2016.

### Measures to address fiscal risks (selected)
- Revenue policies:
  - Prudent projection of revenue gains from anti-evasion campaigns.
  - Large unbudgeted windfalls from disputed tax payments will not be counted as revenue until disputes are resolved.
  - Authorities committed not to grant further tax exemptions or preferential rates without IMF consultation or compensatory measures.
  - A fiscal policy unit at MoF will update and improve the survey of tax expenditures annually (SB).
- Arrears prevention and local government arrears:
  - First survey found around 0.8 percent of GDP of legacy local government arrears at end-December 2015.
  - 0.5 percent of GDP are regular and fully documented bills and have been included in general government debt stock.
  - Survey to be updated quarterly (SB); local governments to prepare action plans by end-September 2016 (SB) to clear legacy arrears by restructuring liabilities and boosting own revenues.
  - Donor-supported new law on local finances is being prepared; a decision to prevent recurrence of central government arrears in public investment projects was taken as a prior action.
  - A new multiyear commitment registry will be operational by end-September, in time for the 2017–19 MTBF.
- Contingent fiscal risks:
  - Property compensation claims: Constitutional Court reviewing December 2015 law; ECHR processing cases—authorities setting aside contingency reserves.
  - Public Private Partnerships (PPPs): Parliament amended Organic Budget Law in June to limit PPP stock, integrate PPPs into budgetary process, and strengthen MoF role; MoF to clarify PPP Law, ensure PPPs follow international best practice, and staff new fiscal risks unit by end-September 2016 (SB).

### Planned structural fiscal reforms (selected)
- Tax policy:
  - Introduce a valuation-based property tax by end-2017.
  - Establish a working group and prepare a concept note and valuation methodology; draft related legislation by end-September 2016 (SB).
  - Parliament to approve enabling legislation by end-2016 (SB).
  - Pilot application in Tirana starting 2017.
  - Temporary reduction in capital gains tax on property valuation from 15 percent to 2 percent to encourage voluntary reassessment; authorities considering an amnesty scheme for large stocks of old tax arrears.
- Revenue administration:
  - Phase in a modern compliance risk management approach for major risk clusters (SB).
  - Prior action: approved function-based HQ restructuring and restructured GDT’s Large Taxpayer Office by sector specialization.
  - Overhaul tax procedures code to streamline audits and improve appeals and taxpayer services.
- Public financial management:
  - Improve MTBF and public investment management; strengthen project evaluation, selection, execution, and monitoring; reduce fragmentation in line with PIMA recommendations.

### Safeguarding financial stability and unlocking credit
- Monetary policy:
  - With inflation significantly below BoA’s target of 3 percent, accommodative monetary policy is expected to continue in the near term.
  - Monetary easing impact on credit has been modest due to high bank risk aversion, weak corporate credit demand, and extensive euroization.
  - BoA has used forward guidance and a negative remuneration rate on required reserves in euros and sees room to use conventional tools further.
  - Concern that lowering the lek-euro interest rate differential below a certain level could heighten exchange rate volatility; about half of foreign currency denominated loans are unhedged.
- Central bank governance and safeguards:
  - Progress in implementing safeguards and rebuilding BoA credibility; authorities working on amending the BoA Law with TA from Bank of Italy and the Fund to align with the European System of Central Banks Statute and strengthen independence, governance, and operations.
- Supervision and capital: 
  - BoA maintains supervisory vigilance, monitoring banks’ resilience, capital, and liquidity, focusing on fastest-growing and systemically important banks.
  - NPL ratios remain very high in some banks though liquidity and capital are above regulatory thresholds.
  - Authorities committed to repeal by end-2016 temporary changes to capital requirements designed to encourage moderate credit growth.
  - To contain euroization risks and align with Basel II, authorities will gradually unwind lower risk weights on Albanian government securities issued in a foreign currency.
  - Crisis management framework being strengthened by expanding deposit insurance and aligning bank resolution framework with the EU’s Bank Recovery and Resolution Directive.
- Nonperforming loans (NPLs) strategy and legal reforms:
  - Substantial progress on a comprehensive NPL action plan: New Bankruptcy Law and Private Bailiffs Law submitted to Parliament in June; planned amendments to Civil Procedure Code to increase NPL resolution efficiency (SB).
  - With Fund TA, measures to accelerate NPL reduction via out-of-court debt restructuring and regulations to require banks to grant loans based on companies’ fiscal declarations starting January 2018.
  - Implementation status highlights (selected):
    - Amendments to BoA regulations: Approved in March 2016.
    - Amendments to Law on Registration of Immovable Properties: Approved by Parliament in March 2016.
    - Improvements in Credit Register: Completed in April 2016 (with ongoing incorporation of credit scoring).
    - Amendments to Law on Securing Charges: Submitted to Parliament in May 2016.
    - New Bankruptcy Law, Amendments to Civil Code, and Private Bailiffs Law: Submitted to Parliament in June 2016; implementing bylaws due by end-2016.
    - Out-of-court restructuring and amendments to Civil Procedure Code: In progress.
- Nonbank sector supervision:
  - Nonbank financial sector growth raises supervisory needs: investment funds grew from 1.2 percent of GDP in 2012 to 4.7 percent of GDP in 2015.
  - AFSA progress: executive board vacancies filled; new liquidity and asset valuation regulations for investment funds to be phased in by mid-2017; amendments to Collective Investment Undertaking Law strengthened enforcement powers.
  - Concerns: single investment fund custodian is a small bank raising systemic vulnerability; AFSA committed to capacity building, risk management, crisis preparedness, and encouraging custodian competition.

### Advancing structural reforms (electricity sector focus)
- Electricity reform progress and fiscal risks:
  - Fiscal support to power sector (public guarantees and policy net lending) at 0.3 percent of GDP continues to weigh on public finances; weather-related risks remain high.
  - Authorities committed to gradually unwind public support for the sector by 2020.
  - Reform achievements include sustained increases in bill collections, reduced distribution losses, and stronger finances of state-owned electricity companies.
- Reform priorities:
  - Further liberalize the electricity market.
  - Invest prudently in meters and grid infrastructure.
  - Strengthen corporate governance in the sector.
- Specific implementation steps and timelines:
  - New power sector law schedules moving all medium-voltage customers out of the regulated tariff structure by end-2018.
  - Removal of 35 kV customers delayed but expected to start by end-September 2016; 20 kV customers to follow by end-2016 (SBs).
  - Authorities will prepare a quarterly survey of arrears of the electricity sector to the private sector (SB).
  - Quarterly financial statements for state-owned generation, transmission, and distribution companies will continue to be published (SB).

*Source: IMF staff report (chapter excerpt)._

### 23. The authorities propose, and staff supports, the following modifications to program

### 23. The authorities propose, and staff supports, the following modifications to program

### Modifications to program conditionality
- Change the test date for the structural benchmark and the indicative target on central government arrears accumulation to end-October 2016 (from end-November) to allow sufficient time for both to be assessed before the program expires.
- Modify marginally targets for November 2016 in line with the updated economic outlook:
  - Authorities’ updated monthly budget plans justify revisions to the November PCs on the primary balance and primary expenditure.
  - Revised projections for imports justify a slight increase in the NIR PC for November.
- To allow more time to recruit qualified staff for MoF’s fiscal risks unit and to complete preparatory steps for removal of 35 kV customers from the regulated market, reschedule the related structural benchmarks to September 2016.
- Modify the structural benchmark related to the valuation-based property tax to reflect the authorities’ updated roadmap.

### Financing, Fund obligations, and debt projections
- Program financing and donor support:
  - EBRD is expected to provide a loan of €118 million in 2016 to finance a restructuring of electricity sector debt held by domestic commercial banks.
  - EU is providing €15–20 million annually over 2016–18, in the form of a grant for balance of payments support linked to the implementation of Albania’s PFM reform strategy.
  - World Bank is expected to provide a development policy loan of $100 million for budget support in 2017.
- Fund repayment and debt service projections:
  - By the end of the Extended Arrangement in 2017, Fund credit outstanding is projected to be 3.2 percent of GDP, or 13.5 percent of gross reserves.
  - Debt service to the Fund is expected to peak in 2021 at around 0.4 percent of GDP and less than 3 percent of international reserves.
  - External debt trajectory:
    - External debt peaking at 42.4 percent of GDP in 2017, declining to 37.2 percent of GDP by 2021.
    - External public debt falling from 36.1 to 30.2 percent of GDP.
- Assessment: Repayment risks are limited, supported by these repayment capacity indicators and Albania’s strong record of repaying the Fund and robust program performance to date.

### Risks to the program
- Political and implementation risks:
  - Next general election due by mid-2017 could test authorities’ perseverance with reforms and commitment to fiscal consolidation.
  - Revenue mobilization is vulnerable to constraints on administrative and technical capacity and requires sustained political will.
  - Electricity sector reforms face implementation and weather-related risks and require sustained political commitment over the medium term.
- Mitigating factors:
  - Prospect for EU accession provides a catalyst for reform.
  - Extensive TA by the Fund and other donors will continue to build capacity to manage macroeconomic risks.

### Staff appraisal — macroeconomic outlook and policy priorities
- Growth and vulnerabilities:
  - Economic recovery is strengthening but downside risks persist given the uncertain outlook for European recovery.
  - Albania should reduce vulnerabilities and ensure steadfast implementation of its reform agenda to boost growth.
- Fiscal policy and debt sustainability:
  - Authorities should persevere with fiscal consolidation, safeguard financial stability, and build on structural reforms, focusing on reforms critical for improving the business climate, including strengthening the judiciary and addressing corruption in line with key priorities in EU accession negotiations.
  - Determined action is needed for timely implementation of the structural reform agenda for the remaining duration of the program.
  - Commitment to achieving fiscal targets is welcome and should be supported by efficient and sustainable tax base-broadening measures to create fiscal space for productive spending.
  - Authorities’ determination to achieve their 2016 budget deficit target signals continuing commitment to shore up debt sustainability.
  - Steadfast fiscal consolidation in 2017 and beyond would help lower public debt to around 60 percent of GDP by end-2019.
- Revenue measures and tax policy:
  - Gradual consolidation strategy based on broadening the tax base and improving tax compliance and administration is appropriate.
  - Authorities should refrain from granting any further tax exemptions or preferential tax rates.
  - Proposal to forgive tax arrears should not proceed without a thorough analysis of their collectability.
  - Steps to introduce a valuation-based property tax should be expedited.
  - Proposed temporary reduction of the capital gains tax on property value reassessments should support implementation of the property tax reform agenda.
  - Refocusing the compliance improvement campaign to target high-risk, high-value segments and harness modern compliance risk management tools is welcome.
- Fiscal risks, public investment, and decentralization:
  - Strengthen credibility of the medium-term budgetary framework to reduce the risk of unfunded commitments.
  - Strengthen capacity to execute high-quality public investment projects by focusing on better project planning and appraisal, in line with the Public Investment Management Assessment recommendations.
  - Commitment to strengthen the PPP framework is welcome.
  - Expedite work on the draft law on local finances to mitigate risks from fiscal decentralization and improve reporting and monitoring.
  - Promptly resolve the emerging stock of arrears at the local level.
  - Sustain progress with arrears clearance and prevention at the central government level by urgently implementing multi-year commitment limits and permanently deactivating the large stock of unbudgeted investment projects.
- Power sector reform:
  - Continued progress on power sector reform would mitigate fiscal risks.
  - Steadfast implementation should focus on further liberalizing the electricity market, investing in meters and grid infrastructure, and strengthening corporate governance in the sector.
- Monetary policy and financial stability:
  - BoA’s monetary easing stance is appropriate; space remains under the conventional monetary policy framework for further easing.
  - Central bank should maintain an accommodative policy stance as long as inflation expectations remain well-anchored and financial stability concerns are contained.
  - Any lowering of the remuneration rate on required euro deposits into negative territory, or use of other unconventional monetary policy tools, should be undertaken with caution.
  - Rebuilding BoA’s credibility and safeguarding its independence are critical; work on amending the central bank law should be accelerated.
- Banking sector reform and supervision:
  - Tackling high NPLs is essential for easing bank risk aversion and reviving credit flows; speedy approval of the Bankruptcy Law will be crucial.
  - BoA’s microprudential focus on the fastest-growing and systemically important segments should be strengthened further.
  - Authorities should seek to reduce euroization and the share of unhedged borrowers in foreign currency in the banking system.
  - Supervision of nonbank financial institutions needs strengthening through capacity building, proactive risk management, and improved crisis preparedness.

*Source: IMF staff report text provided in content unit _cr16289.*

### 35. In light of the progress so far and the authorities’ policy commitments going forward,

### _cr16289 - 35. In light of the progress so far and the authorities’ policy commitments going forward,

### Staff recommendation
- Staff supports the completion of the Eighth Review under the Extended Arrangement.
- Staff supports the authorities’ request for modification of performance criteria.

### Real sector and inflation projections
- Real GDP growth projections (growth rate in percent):
  - 2013: 1.0
  - 2014 Prel.: 1.8
  - 2015 Prog.: 2.6
  - 2016 Rev.: 3.4
  - 2017 Prog.: 3.4
  - 2018 Prog.: 3.8
  - 2019 Prog.: 4.1
  - 2019 (alternate) 4.1
- Consumer Price Index (average, percent):
  - 2013: 1.9
  - 2014 Prel.: 1.6
  - 2015 Prog.: 1.9
  - 2016 Rev.: 1.9
  - 2017 Prog.: 1.0
  - 2018 Prog.: 2.2
  - 2019 Prog.: 2.6
  - 2019 Prog. (eop): 3.0
- Output gap (percent):
  - 2013: -0.7
  - 2014: -1.1
  - 2015: -1.2
  - 2016: -1.0
  - 2017: -1.0
  - 2018: -0.7
  - 2019: -0.3
  - 2019 (end): -0.1

### Fiscal sector — key aggregates (percent of GDP and levels)
- Total revenue and grants (percent of GDP): 24.0 (2013); 26.3 (2014 Prel.); 26.2 (2015 Prog.); 26.8 (2016 Rev.); 27.2 (2017 Prog.); 26.6 (2018 Prog.); 26.5 (2019 Prog.); 26.3 (2019)
- Tax revenue (percent of GDP): 22.0 (2013); 24.1 (2014); 23.6 (2015); 24.3 (2016); 24.6 (2017); 24.3 (2018); 24.1 (2019); 24.0 (2019)
  - VAT: 8.0 (2013); 8.9 (2014); 8.7 (2015); 8.7 (2016); 8.8 (2017); 8.7 (2018); 8.7 (2019)
  - Social insurance contributions: 4.4 (2013); 5.0 (2014); 5.0 (2015); 5.2 (2016); 5.3 (2017); 5.2 (2018); 5.1 (2019)
- Total expenditure (percent of GDP): 29.2 (2013); 32.2 (2014); 30.7 (2015); 29.2 (2016); 29.7 (2017); 29.3 (2018); 29.4 (2019); 29.6 (2019)
  - Current expenditure (percent of GDP): 24.3 (2013); 25.0 (2014); 24.7 (2015); 25.3 (2016); 25.7 (2017); 25.1 (2018); 24.9 (2019); 25.0 (2019)
  - Capital expenditure (percent of GDP): 4.8 (2013); 4.3 (2014); 4.3 (2015); 3.7 (2016); 3.8 (2017); 3.8 (2018); 4.0 (2019); 4.2 (2019)
  - Interest (percent of GDP): 3.2 (2013); 2.9 (2014); 2.7 (2015); 2.8 (2016); 2.8 (2017); 2.5 (2018); 2.4 (2019); 2.3 (2019)
- Overall balance (percent of GDP):
  - 2013: -5.2
  - 2014: -5.9
  - 2015: -4.5
  - 2016: -2.5
  - 2017: -2.5
  - 2018: -1.6
  - 2019: -0.8
  - 2019 (end): -0.2
- Primary balance (percent of GDP): -2.0 (2013); -3.0 (2014); -1.9 (2015); 0.3 (2016); 0.2 (2017); 0.9 (2018); 1.6 (2019); 2.1 (2019)
- Financing (percent of GDP): 5.2 (2013); 5.9 (2014); 4.5 (2015); 2.5 (2016); 2.5 (2017); 1.6 (2018); 0.8 (2019); 0.2 (2019)
  - Domestic financing (percent of GDP): 4.4 (2013); 3.4 (2014); -0.4 (2015); -1.3 (2016); 0.0 (2017); -0.5 (2018); -0.5 (2019); -0.7 (2019)
  - Foreign financing (percent of GDP): 0.8 (2013); 2.5 (2014); 4.9 (2015); 3.7 (2016); 2.5 (2017); 2.1 (2018); 1.3 (2019); 0.9 (2019)
- General Government Debt (percent of GDP): 70.4 (2013); 72.0 (2014); 73.0 (2015); 70.4 (2016); 71.9 (2017); 68.7 (2018); 65.0 (2019); 60.7 (2019)
  - Domestic debt (percent of GDP): 43.4 (2013); 42.5 (2014); 38.9 (2015); 34.6 (2016); 35.8 (2017); 32.7 (2018); 30.0 (2019); 27.3 (2019)
  - External debt (percent of GDP): 27.0 (2013); 29.6 (2014); 34.0 (2015); 35.8 (2016); 36.1 (2017); 36.1 (2018); 35.0 (2019); 33.4 (2019)

### Fiscal levels (billions of leks)
- Total revenue and grants (billions of leks):
  - 2013: 323.7
  - 2014: 366.6
  - 2015: 377.5
  - 2016 Prog./Rev.: 410.0 / 410.1
  - 2017 Prog.: 427.4
  - 2018 Prog.: 454.9
  - 2019 Prog.: 485.8
- Total expenditure (billions of leks):
  - 2013: 394.1
  - 2014: 448.6
  - 2015: 443.0
  - 2016 Prog./Rev.: 447.9 / 448.1
  - 2017 Prog.: 470.1
  - 2018 Prog.: 504.1
  - 2019 Prog.: 545.4
- Overall balance (billions of leks): -70.4 (2013); -82.1 (2014); -65.5 (2015); -37.9 (2016); -38.0 (2017); -25.0 (2018); -13.1 (2019); -2.9 (2019)

### External sector — balance of payments and reserves
- Current account (percent of GDP): -10.8 (2013); -12.9 (2014); -11.2 (2015); -13.0 (2016); -13.4 (2017); -12.6 (2018); -11.4 (2019)
- Trade balance (goods and services, percent of GDP): -18.0 (2013); -19.0 (2014); -17.2 (2015); -18.8 (2016); -18.8 (2017); -17.7 (2018); -16.4 (2019)
- Exports (percent of GDP): 18.3 (2013); 9.4 (2014); 7.5 (2015); 6.3 (2016); 6.1 (2017); 6.2 (2018); 6.1 (2019)
  - Energy exports (percent of GDP): 5.7 (2013); 4.6 (2014); 3.1 (2015); 2.2 (2016); 2.1 (2017); 2.1 (2018); 2.1 (2019)
- Imports (percent of GDP): 36.1 (2013); 31.6 (2014); 29.7 (2015); 28.8 (2016); 28.4 (2017); 27.5 (2018); 26.2 (2019)
  - Energy imports (percent of GDP): 6.6 (2013); 6.1 (2014); 3.9 (2015); 4.0 (2016); 4.7 (2017); 4.7 (2018); 4.7 (2019)
- Gross international reserves (in billions of Euros): 2.0 (2013); 2.2 (2014); 2.9 (2015); 2.8 (2016); 2.7 (2017); 2.7 (2018); 2.7 (2019); 2.6 (2019)
  - Reserves in months of imports of goods and services: 4.5 (2013); 5.0 (2014); 6.2 (2015); 5.8 (2016); 5.4 (2017); 5.3 (2018); 5.1 (2019); 4.6 (2019)
- Current transfers (percent of GDP): 7.1 (2013); 7.3 (2014); 7.4 (2015); 7.3 (2016); 7.0 (2017); 6.8 (2018); 6.5 (2019)

### Monetary and financial sector indicators
- Broad money growth (percent): 2.3 (2013); 4.0 (2014); 1.9 (2015); 3.8 (2016); 2.6 (2017); 5.4 (2018); 6.2 (2019); 6.5 (2019)
- Private credit growth (percent): -1.4 (2013); 2.0 (2014); -2.8 (2015); 4.2 (2016); 2.3 (2017); 7.0 (2018); 8.7 (2019); 11.6 (2019)
- Velocity (nominal GDP/broad money): 1.2 (2013–2019)
- Bank of Albania repo rate (percent): 3.0 (2013); 2.3 (2014); 1.8 (2015)
- Selected financial soundness indicators (sample):
  - Regulatory capital as a percent of risk-weighted assets: 17.1 (Dec-07); 17.2 (Dec-08); 16.2 (Dec-09); 15.4 (Dec-10); 15.6 (Dec-11); 16.2 (Dec-13); 18.0 (Dec-14); 16.8 (Mar-15); 15.8 (Jun-15); 16.0 (Sep-15); 15.8 (Dec-15); 15.7 (Mar-16); 16.0 (Mar-16)
  - Nonperforming loans (gross) as a percent of total loans: 3.4 (Dec-07); 6.6 (Dec-08); 10.5 (Dec-09); 14.0 (Dec-12); 18.8 (Dec-13); 22.5 (Dec-14); 23.5 (Mar-15); 22.8 (Jun-15); 22.8 (Sep-15); 20.9 (Dec-15); 20.6 (Mar-16); 18.2 (Mar-16); 19.3 (Mar-16)
  - Foreign currency-denominated loans to total loans: 72.5 (Dec-07); 72.6 (Dec-08); 70.2 (Dec-09); 69.8 (Dec-12); 67.9 (Dec-13); 64.5 (Dec-14); 63.0 (Mar-15); 62.4 (Jun-15); 62.2 (Sep-15); 61.7 (Dec-15); 61.2 (Mar-16); 60.8 (Mar-16); 60.6 (Mar-16)

### Program reviews, purchases, and conditionality
- Schedule of reviews and purchases (millions of SDR; in percent of quota):
  - February 28, 2014: 23.55 (16.9) — Board approval of arrangement
  - June 28, 2014: 23.55 (16.9) — Observance of end-March 2014 and continuous performance criteria and completion of first review
  - September 15, 2014: 23.55 (16.9) — Observance of end-June 2014 and continuous performance criteria and completion of second review
  - December 15, 2014: 23.55 (16.9) — Observance of end-September 2014 and continuous performance criteria and completion of third review
  - April 15, 2015: 28.88 (20.7) — Observance of end-December 2014 and continuous performance criteria and completion of fourth review
  - July 15, 2015: 28.88 (20.7) — Observance of end-April 2015 and continuous performance criteria and completion of fifth review
  - November 15, 2015: 28.88 (20.7) — Observance of end-August 2015 and continuous performance criteria and completion of sixth review
  - March 15, 2016: 28.65 (20.6) — Observance of end-December 2015 and continuous performance criteria and completion of seventh review
  - July 15, 2016: 28.65 (20.6) — Observance of end-April 2016 and continuous performance criteria and completion of eighth review
  - November 15, 2016: 28.65 (20.6) — Observance of end-August 2016 and continuous performance criteria and completion of ninth review
  - February 15, 2017: 28.63 (20.6) — Observance of end-November 2016 and continuous performance criteria and completion of tenth review
  - Total: 295.42 (212.1)
- Albania's IMF quota: SDR 139.3 million.

### Indicators of capacity to repay the Fund (under obligated repurchase schedule)
- Fund repurchases and charges (in millions of SDR):
  - 2013: 6.9
  - 2014: 6.1
  - 2015: 5.3
  - 2016: 5.1
  - 2017: 5.7
  - 2018: 8.8
  - 2019: 18.0
  - 2020: 30.8
  - 2021: 46.9
- Fund credit outstanding (end of period, in millions of SDRs):
  - 2013: 16.4
  - 2014: 57.7
  - 2015: 187.1
  - 2016: 241.5
  - 2017: 296.8
  - 2018: 291.7
  - 2019: 277.3
  - 2020: 249.6
  - 2021: 205.1
- Fund credit outstanding (in percent of quota): 27.3 (2013); 96.1 (2014); 131.8 (2015); 173.4 (2016); 213.0 (2017); 209.4 (2018); 199.1 (2019); 179.2 (2020); 147.3 (2021)

*Sources: Albanian authorities; Bank of Albania; Ministry of Finance; donors; and IMF staff estimates and projections.*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### Program status and requests
- The Extended Arrangement approved by the Executive Board of the IMF in February 2014 remains the anchor of policies.
- Performance:
  - All end-April and continuous performance criteria were met.
  - The lower outer band under the Inflation Consultation Clause was missed at end-April.
  - Two indicative targets (ITs) were missed: distribution losses in the electricity sector and accumulation of new arrears.
- Structural benchmarks:
  - Six structural benchmarks were implemented, three with delay, and three were missed (two proposed to be rescheduled).
- Actions and requests:
  - An inflation consultation was completed at the time of the Seventh Review; remedial measures for missed ITs are being implemented.
  - Request completion of the eighth review under the Extended Arrangement.
  - Request the purchase of SDR 28.65 million.
  - Request modification of performance criteria as described in Table 1 of the MEFP and in the TMU.
  - Authorize publication of this letter, the MEFP, the TMU, and the IMF staff report on the eighth review, subject to Executive Board approval.

### Recent economic developments (as presented)
- Growth and domestic demand:
  - Real GDP grew by 2.6 percent in 2015 (compared with 1.8 percent in 2014).
  - High-frequency indicators suggest further acceleration in H1 2016; momentum driven by private investment (large energy-related FDI inflows) and pickup in household consumption.
- Inflation:
  - Headline inflation dropped sharply in Q1 2016 due to lower food prices, delayed pass-through from lower global oil prices, and domestic slack.
  - Inflation recovered to 1.2 percent in June 2016.
- Current account and reserves:
  - The current account deficit widened in 2016:Q1 (from 11.2 percent of GDP in 2015).
  - Reserves declined marginally but remain above six months of imports.

### Outlook (projections and expectations)
- GDP:
  - GDP growth projected at 3.4 percent in 2016.
- Inflation:
  - Average headline inflation in 2016 projected to remain subdued at 1.0 percent.
  - BoA target for medium-term inflation: 3 percent.
  - Output gap expected to close by 2019.
- Current account and reserves:
  - Current account deficit projected to widen to around 13 percent of GDP in 2016–17.
  - Gross official reserves in 2016–17 expected to remain above 5 months of imports of goods and services.
  - Current account to be financed primarily by FDI inflows; medium-term gradual decline in the deficit expected.

### Fiscal policy commitments and measures (2016 and medium term)
- Consolidation goals:
  - Goal to lower general government debt-to-GDP ratio to around 60 percent by 2019, from 73 percent at end-2015.
  - Committed to undertaking measures of at least 1 percent of GDP annually.
  - Increase staffing and capacity at MoF’s debt management unit.
- 2016 primary balance target:
  - Target: primary surplus of 0.2 percent of GDP in 2016.
  - Commitment to strict budgetary discipline, savings in current expenditure, strengthening tax base and compliance, and taking additional measures if needed.
  - Any permanent budget overperformance will be saved to reach program consolidation goals.
- Revenue developments and measures:
  - Tax revenues in first five months of 2016 were in line with budget targets.
  - Performance highlights: excises, social contributions, and corporate income tax performed better than expected; local taxes underperformed.
  - Measures:
    - Reform focus on high-risk, high-value segments per compliance risk management strategy.
    - Plan to amend the tax procedures law to be more business-friendly and strengthen compliance incentives.
    - Freeze of 2.5 billion lek in capital expenditure, made contingent on additional revenues from reforms.
    - New fiscal policy unit at MoF to address revenue forecasting and monitoring; update the tax expenditures survey annually and expand it with Fund TA to include exemptions administered by GDT and preferential rates, with rationale and eventual efficiency assessment.
    - Commitment not to grant further tax exemptions or preferential rates without consulting the IMF.
    - Budget buffers planned to cope with outcome of pending tax disputes; large unbudgeted windfalls from disputed tax payments to be adjusted under the program until resolved.
- Electricity sector fiscal support:
  - Aim to gradually reduce public guarantees and policy net lending to the sector to 5 billion lek in 2016 and 4.5 billion lek in 2017, with the objective of eliminating them by 2020.
  - If government support exceeds programmed amounts, commit to offsetting fiscal measures to meet fiscal targets.
- Other fiscal risk management measures:
  - Local government reform:
    - Survey showed around 12 billion lek of local government arrears at end-December 2015, mostly inherited from old units prior to 2015 territorial reform.
    - Require local governments to prepare action plans by end-September 2016 to clear legacy arrears from their own resources with external auditors ensuring integrity.
    - Preparing a new law on local finances with USAID and World Bank assistance.
  - Capital expenditure management:
    - Public disclosure of total cost and sunk cost of each outstanding project.
    - MoF will publish a list of projects the 2016 revised budget will support, consistent with the MTBF.
    - Prior action: MoF order requiring projects not in the MTBF to be funded only after approval by the Strategic Planning Committee and authorizing continuation of a specified list of projects that fit the MTBF.
  - Arrears prevention and PFM modernization:
    - AGFIS extended to 15 budget institutions (accounting for 84 percent of the budget) and one local government; target to cover 50 budget institutions by 2018 and 100 by 2020.
    - New multi-year commitment registry to be operational by end-September 2016.
    - Immediate stricter internal controls in AGFIS at pre-commitment phase for Albanian Roads Authority.
    - Revenue administration reforms and streamlined public investment management to prevent recurrence of arrears.
  - Public-Private Partnerships (PPPs):
    - Budget Law amended to limit stock of PPPs, integrate PPPs into budgetary process, and strengthen MoF oversight.
    - Planned steps:
      - By end-September 2016: clarify PPP Law with legal opinion and bylaws; prepare a standard PPP contract clarifying dispute resolution mechanisms.
      - MoF fiscal risks unit to be fully staffed by end-September 2016 to ensure PPP fiscal costs and contingent liabilities are transparently accounted for.
      - By end-2016: launch public register of all active PPP projects and publish summaries and contracts (excluding confidential information).
      - All PPP proposals to be subject to feasibility study and value-for-money analysis; fiscal risks unit to start evaluating fiscal risks and providing risk assessments for budget documents by end-2016.
  - Property compensation claims:
    - Budgeted 3 billion lek in the 2016 budget for ECHR-related property compensation claims.
    - Commit to set aside sufficient contingency reserves against potential ECHR compensation decisions.

*Source: Appendix I. Letter of Intent and Attachment I. Memorandum of Economic and Financial Policies (August 15, 2016).*

### 13. Tax administration. Advancing tax administration reforms is a key policy priority that

### _cr16289 - 13. Tax administration. Advancing tax administration reforms is a key policy priority that

### Tax administration
- Strengthen tax administration by addressing findings from the recent Tax Administration Diagnostic Assessment.
- Fully committed to implementing the GDT reforms in its corporate strategy.
- Prior action: adopted the implementation plan for a function-based headquarters structure for GDT in early August.
- Implementation begun; Large Taxpayer Office restructured with specialization according to business sectors.
- Risk Management Unit to be fully staffed by end-September 2016 to identify major compliance risks and develop mitigating strategies.
- GDT has started phasing in a modern compliance risk management approach for one major risk cluster; will commence another by end-September 2016.
- By end-2016, GDT will streamline its regional and local office structure to match business needs.
- By end-2016, taxpayer service function will be upgraded to deliver easy-to-understand and accessible guidance to taxpayers based on their needs and compliance risks, using a variety of communication channels.
- By end-2017, GDT will conduct a comprehensive review of its audit function.

### Customs administration
- GDC introduced online monitoring of customs warehouses.
- GDC working on a restructuring proposal informed by external consultant recommendations.
- GDC to accelerate discussions with neighboring countries' customs authorities to develop real-time intelligence sharing on smuggling risks.
- Upgrade fiscal stamps system to conform to international “track and trace” standards set out in the Framework Convention for Tobacco Control.
- Put in place more effective measures to supervise and monitor fuel movements, including remote GPS-based surveillance in high-risk areas.
- Start using a national customs assessment online portal by end-September 2016 to reduce subjectivity in customs assessments.

### Valuation-based property tax
- Commit to introducing a valuation-based property tax by end-2017.
- Establish and staff a working group between the MoF, IPRO, and the association of local municipalities as a first step.
- Prepare a concept note for the development of a national fiscal cadastre outlining legal framework, institutional roles, responsibilities, and processes for design and data collection for property valuation.
- Accelerate digitalization of the registry.
- With Fund TA, develop a valuation formula and methodology, and draft related legislation by end-September 2016.
- By end-2016, legislation enabling local governments to implement the valuation-based property tax will be approved by Parliament (modified structural benchmark).
- From 2017, apply the new methodology in Tirana on a pilot basis.

### Medium-Term Budget Framework (MTBF)
- Amended the Organic Budget Law in early June to shore up MTBF credibility.
- Starting with the 2016 budget, MTBF contains the total approved cost, the sunk cost so far, and remaining cost beyond the three-year window of the MTBF for all projects.
- In 2016, MoF will strengthen costing of sectoral strategies to distinguish core allocations from new policy initiatives in the MTBF.
- Starting with the 2017 budget, the MTBF will make that distinction at the sectoral and program level.
- Committed to lowering public debt every year in line with the amended Organic Budget Law.
- Ensure multi-year quantitative fiscal targets for the duration of its mandate are specified in the program of the government.

### Public Investment Management
- Improve evaluation, selection, execution, and monitoring of public investment projects; priority on coordination among government bodies.
- By end-September 2016, fully staff and operationalize the public investment management unit in MoF (per Public Investment Management Assessment recommendations).
- Starting with the 2017 budget, integrate the Regional Development Fund (RDF) projects into the MTBF, budget cycle, and public investment monitoring framework.
- Impose a floor on externally funded capital spending to minimize in-year reallocations toward domestically funded capital expenditure.
- Allocate more resources toward maintenance of existing infrastructure.
- In 2017, strengthen appraisal process for major projects and expand monitoring and assessment of SOE investment projects that pose budget risks.
- Review and streamline project classification to reduce fragmentation; aim to use new classification system for all projects included in the 2018 budget.

### Public Procurement
- Strengthen public procurement through training, stricter controls, and sanctions for non-compliance.
- Prepare legal amendments enhancing independence of the Public Procurement Agency and the Public Procurement Commission.

### Monetary and Exchange Rate Policy
- Monetary policy anchored by an inflation-targeting framework and a fully flexible exchange rate regime.
- BoA committed to achieve an average annual CPI inflation of 3 percent over the medium term.
- Monetary policy will also strive to close the output gap and avoid excessive volatility in financial markets; monitored under an Inflation Consultation Clause.
- Monetary policy to remain accommodative for the foreseeable future to support recovery in aggregate demand and meet the 3 percent inflation target.
- Risks to inflation are on the downside due to volatile external environment, imported disinflationary pressures, and risk aversion in the banking system.
- BoA stands ready to utilize all available instruments if inflation surprises on the downside.
- Policy rate at 1¼ percent, following cumulative 50 bps rate cuts in April and May; there is still space for conventional easing and any decisions on additional measures will be taken in consultation with IMF staff.
- Exchange rate determined by market forces; BoA undertakes only small pre-announced interventions.
- BoA will aim to maintain adequate reserve coverage over the medium term.
- For program duration: will not impose or intensify restrictions on payments and transfers for current international transactions, nor introduce or modify multiple currency practices, nor conclude bilateral payments agreements violating Article VIII of the IMF’s Articles of Agreement.
- Will not impose or intensify import restrictions for balance of payments reasons.
- Launched process of amending the BoA Law to align with the European System of Central Banks Statute, strengthen institutional and operational independence, and improve governance and operations (taking into account recommendations from the Bank of Italy and Fund TA).
- Strengthen coordination and information sharing between BoA and MoF on liquidity and debt management through monthly meetings; MoF will discuss with BoA in advance any external or domestic debt operations.

### Safeguarding Financial Sector Stability
- BoA maintaining supervisory vigilance, focusing on fastest-growing and systemically important banking segments.
- Amendments to the Deposit Insurance Law approved by Parliament in March 2016 to extend deposit insurance starting in 2017.
- Working on a new Bank Resolution Law aligning with the EU’s Bank Recovery and Resolution Directive.
- Reinstatement of full capital requirements on lending activity to ensure healthy capitalization while retaining measures discouraging bank outflows to non-resident entities, as appropriate.
- BoA will raise prudential requirements on systemic banks expanding into nonbanking activities, as necessary.
- Strengthen monitoring of loans to unhedged borrowers to reduce their share in total outstanding credit from its current elevated levels; macroprudential actions will be taken if necessary to constrain borrowing in foreign currency by unhedged borrowers.
- Temporary measure in response to delays in external debt issuance: central bank reduced risk weights on Albanian government securities issued in foreign currency from 100 to 50 percent; BoA will gradually roll back this measure by 2021 and ensure any additional investments by banks in such securities, compared to levels in December 2015, will be risk-weighted at 100 percent.
- NPLs declined to 20 percent at end-April 2016 from a peak of 25 percent in September 2014 following mandatory NPL write-offs.
- Comprehensive NPL strategy includes:
  - March 2016: BoA revised write-off terminology, changed time limit for holding repossessed collateral on banks’ books, and improved regulatory framework for NPL sales.
  - Action plan prepared for handling the 35 largest holders of NPLs; implementation through coordination, information sharing, and monitoring.
  - Parliament approved amendments to the Law on the Registration of Immovable Properties in March 2016; amendments to the Law on Securing Charges submitted to Parliament in May 2016.
  - April 2016: Credit Register upgraded to incorporate ongoing legal cases and restructured loans; BoA with EBRD preparing methodology to incorporate credit scoring.
  - With World Bank and IMF technical assistance, new Bankruptcy Law submitted to Parliament in early June 2016; simplifies framework, allows expedited approval of reorganization plans, protects rights of secured and unsecured creditors.
  - June 2016: amendments to the Private Bailiffs Law submitted to increase efficiency of foreclosure procedures and debt collection.
  - MoF and Ministry of Justice to set up working group to draft bylaws implementing amendments to the Bankruptcy Law and Private Bailiffs Law by end-2016.
  - By end-September 2016, submit to Parliament amendments to the Civil Procedure Code to increase efficiency of litigation and foreclosure procedures.
  - June 2016: coordination mechanism set up between BoA and GDT to integrate the tax authority into the collateral execution process.
  - BoA to coordinate with MoF to streamline tax treatment of NPLs, NPL sales, and collateral recovered in judicial procedures.
  - By end-December 2016, with Fund TA, adopt measures to accelerate NPL reduction through out-of-court debt restructuring and amend regulations to require banks to grant loans based on companies’ fiscal declarations, starting in January 2018.

### Non-bank Financial Sector (AFSA)
- March 2016: Parliament approved amendments to the Collective Investment Undertaking Law to strengthen AFSA’s enforcement powers.
- By end-September, AFSA will prepare regulations to strengthen risk management.
- AFSA to adopt policies and procedures to attract and retain skilled staff.
- Encourage competition among investment fund custodians; conduct stress tests and a crisis preparedness exercise in this market segment.
- Set up a crisis management framework for investment funds specifying coordination procedures among funds, custodians, AFSA, and BoA.

### Structural Reforms (Electricity sector)
- Distribution losses fell from 45 percent in 2013 to just under 30 percent in the first five months of 2016.
- Committed to reducing distribution losses to 14 percent by 2019.
- Stepping up investments in metering, cables, substations, and feeders to achieve the goal.
- Focus on improving corporate governance; contracting an operational management services consultant for the distribution company with expectation new team in place by end-2016.
- Started publishing quarterly financial statements for KESh, OST, and OShEE.
- Ministry of Energy and Industry and MoF to strictly monitor KESh and OShEE’s investment plans and economic performance on a monthly basis.
- Restructure overdraft borrowing by electricity SOEs to reduce financial risks.
- New power sector law (approved in 2015) restructures relationships among KESh, OST, and OShEE and moves toward market liberalization in line with EU’s 2009 Electricity Directive.
- Schedule to move all medium-voltage customers out of regulated tariff structure: removal of 35 kV customers delayed to September 2016; 20 kV customers will follow by end-2016.
- On completion, share of deregulated consumption would increase from 13 to 33 percent of total energy consumed by end-2018.
- Plan to review tariff methodology with World Bank to make tariff adjustments more timely and automatic.
- Developing a power exchange and pursuing integration with neighboring electricity markets.
- Transmission line to Kosovo went live in June 2016; another to Macedonia is in the works.

### Statistics
- INSTAT to continue improving macroeconomic statistics quality.
- Submit a revised Law on Statistics to Parliament to strengthen INSTAT’s institutional independence and enable more effective cooperation among INSTAT, MoF, and BoA.
- By end-2016, INSTAT, MoF, and BoA will establish a Memorandum of Understanding detailing processes and responsibilities for data sharing, source data collection, and statistical compilation.

### Program monitoring
- Ninth and tenth program reviews anticipated on or after November 15, 2016, and February 15, 2017, respectively.
- Each review will require observance of conditionality for the most recent test date.

*Source: _cr16289 - 13. Tax administration. Advancing tax administration reforms is a key policy priority that*

### 1. Adopt an implementation plan for a function-based headquarters

### 1. Adopt an implementation plan for a function-based headquarters

### Structural benchmarks and compliance status
- 1. Adopt an implementation plan for a function-based headquarters restructuring of the GDT. — Met.
- 2. Restructure GDT’s Large Taxpayer Office, with specialization according to business sectors. — Met.
- Public Financial Management
  - 3. Repay all central government arrears accumulated through end-April 2016, with the exception of those on court decisions, in order to bring the stock of outstanding arrears below 1 billion lek. — Met.
  - 4. Issue a Ministry of Finance order (i) ensuring that projects not included in the MTBF can only be funded following an approval by the Strategic Planning Committee; and (ii) authorizing the continuation of only a specified list of projects, based on transparent criteria, that can be accommodated in the MTBF. — Met.

### Detailed status from Table 3a (Eighth Review)
- I. Public Financial Management
  - Publish a triannual report on new arrears accumulation in thirteen key ministries, the Regional Development Fund, and GDT on MoF’s website. — Continuous; Due on July 15. — Not met. Implemented with a delay.
  - Publish a quarterly survey of local government arrears on MoF’s website, starting with end-March 2016. — Continuous; Due on June 30. — Not met.
  - Roll out the AGFIS to 15 budget institutions. — End-May 2016 — Met.
  - Fully staff the fiscal risks unit at MoF. — End-June 2016 — Not met. Rescheduled to end-September.
- II. Tax Policy and Administration
  - Restructure GDT’s Large Taxpayer Office with specialization according to business sectors. — End-June 2016 — Not met. Implemented with a delay, as a prior action.
- III. Financial Sector
  - Submit to Parliament a new Bankruptcy Law, incorporating best international practices and simplifying existing procedures. — End-June 2016 — Met.
- IV. Electricity Sector
  - Prepare a quarterly survey of the gross consolidated arrears of the electricity sector (KESh, OST, OShEE) to the private sector. — Continuous — Met.
  - Publish quarterly financial statements for KESh, OST, and OShEE. — Continuous; Due on July 30. — Not met. Implemented with a delay.
  - Remove 35 kV medium-voltage consumers from the regulated tariff system. — End-July 2016 — Not met. Rescheduled to end-September.

### Forward-looking structural benchmarks (Remainder of 2016)
- I. Public Financial Management (selection)
  - Publish a report on new arrears accumulation through end-August 2016 in fourteen key ministries, the Regional Development Fund, and the GDT on MoF’s website. — November 15, 2016.
  - Publish a report on new arrears accumulation through end-October 2016 in fifteen key ministries, the Regional Development Fund, and the GDT on MoF’s website. — January 15, 2017.
  - Publish a quarterly survey of local government arrears on MoF’s website. — Continuous.
  - Formulate comprehensive action plans to deal with local government arrears. — End-Sep. 2016.
  - Fully staff the fiscal risks unit at MoF. — End-Sep. 2016.
- II. Tax Policy and Administration (selection)
  - List and quantify tax expenditures in the annual budget documentation submitted to Parliament. — Continuous.
  - Commence phasing in a modern compliance risk management approach at GDT, starting with two major risk clusters. — End-Sep. 2016.
  - Design a valuation formula and methodology, and draft the legislation for a valuation-based property tax. — End-Sep. 2016.
  - Approval by Parliament of the legislation for a valuation-based property tax. — End-Dec. 2016.
- III. Financial Sector
  - Submit to Parliament amendments to the Civil Procedure Code and Private Bailiffs Law to increase the efficiency of litigation, foreclosure procedures, and debt collection. — End-Sep. 2016.
- IV. Electricity Sector (selection)
  - Prepare a quarterly survey of the gross consolidated arrears of the electricity sector (KESh, OST, OShEE) to the private sector. — Continuous.
  - Publish quarterly financial statements (balance sheet and income statement) for KESh, OST, and OShEE. — Continuous.
  - Start the removal of 35 kV medium-voltage consumers from the regulated tariff system. — End-Sep. 2016.
  - Start the removal of 20 kV medium-voltage consumers from the regulated tariff system. — End-Dec. 2016.

### Key policy actions and operational requirements (from the TMU)
- Exchange rate and gold price parameters (program rates):
  - lek 140.25 = €1
  - lek 103.17 = $1
  - lek 158.05 = SDR 1
  - gold price €920.18 = 1 oz
- Definitions and institutional coverage:
  - For the program, the central government includes extra-budgetary funds.
  - The general government includes the central government, local governments, the Social Security Institute (SSI), and the Health Insurance Institute (HII).
  - The fiscal year: January 1 to December 31.
- Reporting lags (selected):
  - BoA data on Net International Reserves (NIR): lag no more than 45 days after the test date for December test dates; lag no more than 15 days after the test date for all other test dates.
  - Primary modified cash balance: data to Fund with a lag no more than 60 days after December test dates; lag no more than 30 days after other test dates.
  - MoF final data on external arrears: lag no more than two weeks after the end of each month.
  - MoF data on energy subsidies (monthly): lag no more than thirty days.
  - BoA credit to government: data monthly with a lag no more than fifteen days.
- Quantitative baselines and references:
  - Stock of central bank credit to the government at end-December 2013: lek 63.965 billion.
  - Exclusion for primary modified cash balance: preliminary payments by Bankers Petroleum Ltd. in the context of the December 2015 agreement regarding a $57 million tax dispute will be recorded as revenue only at the time of the conclusion of the dispute resolution process and the domestic legal process.
- Adjustors and treatment of specific flows:
  - Primary modified cash balance adjustors:
    - Upward (downward): shortfall (excess) of new energy guarantees, excluding rollover, issued during the year, up to a maximum of the annual budgeted allocation (not apply to December targets). Energy guarantees defined for KESH, OST, and OSHEE.
    - Downward: 50 percent of privatization receipts, up to total privatization receipts of lek 15 billion in a given year.
  - Ceiling on primary expenditure adjustors:
    - Upward (downward): excess (shortfall) of new energy guarantees, excluding rollover, issued during the year, up to a maximum of the annual budgeted allocation (not apply to December targets).
    - Upward: 50 percent of privatization receipts, up to total privatization receipts of lek 15 billion in a given year.
    - Upward: excess of total non-grant revenues over programmed amounts, up to a maximum of lek 2.5 billion in 2016 (excluding Bankers Petroleum preliminary payments as specified).
    - Upward: excess of project grants over the programmed amount.

*Source: _cr16289 - 1. Adopt an implementation plan for a function-based headquarters*

### 32. Average distribution losses are defined as the difference between total electricity entering

### _cr16289 - 32. Average distribution losses are defined as the difference between total electricity entering

### Definition: Average distribution losses
- Average distribution losses are defined as the difference between total electricity entering the distribution system and the amount of electricity billed to consumers by OSHEE, the energy distribution company, as a share of the total amount of electricity entering the distribution system.
- These are measured on a cumulative basis for each calendar year.

### Reporting: distribution losses and arrears
- Data on distribution losses:
  - Will be provided to the Fund by the Ministry of Energy on a monthly basis with a lag of no more than thirty days.
- Central government domestic arrears (ceiling on accumulation) — definitions:
  - Central government domestic arrears consist of domestic expenditure arrears of the central government and domestic tax refund arrears.
  - Domestic expenditure arrears are defined as payments to residents determined by contractual agreements that remain unpaid 30 days after the due date specified by the contract, or, in the absence of a contractual definition, as determined by law.
  - Domestic tax refund arrears are defined as obligations on any valid tax refund claims, in accordance with tax legislation, that remain unpaid 60 days after the claim is submitted.
- Monitoring of arrears accumulation for target purposes:
  - Accumulation of domestic arrears will be monitored through MoF’s triannual survey on arrears accumulation (see paragraphs 38-39).
  - Recording of invoices and tax refund claims should be cumulative, i.e., each trimester should include all invoices/refund claims not paid from previous trimesters, starting from the beginning of 2014.
  - MoF should verify that invoices/refund claims reported in the survey are not already included in the arrears clearance database under the Arrears Prevention and Clearance Strategy (APCS).
- Submission timing:
  - MoF should send to the Fund the consolidated data from the survey with a lag of no more than 75 days after each test date.

### Structural benchmarks (numbered)
- 38. Publish a report on new arrears accumulation through end-August 2016 in fourteen key ministries, the Regional Development Fund, and the GDT on MoF’s website. The ministries covered are Transportation, Health, Education, Defense, Justice, Interior, Agriculture, Finance, Economy, Social Welfare, Urban Development, Culture, Environment, and European Integration. The survey should be published within 75 days after the test date.
- 39. Publish a report on new arrears accumulation through end-October 2016 in fifteen key ministries, the Regional Development Fund, and the GDT on MoF’s website. The ministries covered are Transportation, Health, Education, Defense, Justice, Interior, Agriculture, Finance, Economy, Social Welfare, Urban Development, Culture, Environment, European Integration, and Energy. The survey should be published within 75 days after the test date.
- 40. Publish a quarterly survey of local government arrears on MoF’s website, starting with end-March 2016. The survey should be published within 90 days from the end of each quarter.
- 41. Fully staff the fiscal risks unit at MoF. This benchmark is met when the unit is staffed with one director and 3 staff.
- 42. Formulate comprehensive action plans to deal with local government arrears. This benchmark is met when local government units submit their action plans to MoF, and MoF shares them with Fund staff. The action plans should cover at least 95 percent of the stock of arrears on regular bills at end-2015.
- 43. List and quantify tax expenditures in the annual budget documentation submitted to Parliament. The survey of tax expenditures should be submitted to Parliament by end-November of each year.
- 44. Restructure GDT’s Large Taxpayer Office with specialization according to business sectors. This benchmark is met when a chart of the current organization of the LTO shows that it is organized according to business sectors.
- 45. Commence phasing in a modern compliance risk management approach at GDT, starting with two major risk clusters. This benchmark is met when:
  - (1) strategies have been adopted for the mitigation of two major identified compliance risk clusters;
  - (2) operational plans reflecting the strategies are in place; and
  - (3) substantial operational implementation activities have commenced.
- 46. Design a valuation formula and methodology, and draft the legislation for a valuation-based property tax. This benchmark is met when the three documents are shared with Fund staff.
- 47. Prepare a quarterly survey of the gross consolidated arrears of the electricity sector to the private sector. The survey should be prepared within 15 days from the end of each quarter.
- 48. Publish quarterly financial statements (balance sheet and income statement) for KESh, OST, and OShEE. The statements will be published within 30 days from the end of March, June, and September, and within 120 days from the end of December.

### Monitoring and reporting requirements (paragraph 49 and institutional data lists)
- To facilitate monitoring of program performance, the authorities will provide the following information on a monthly basis (except where noted).

- The Bank of Albania will supply to the Fund:
  - (i) the balance sheets of the BoA;
  - (ii) the separate consolidated accounts of commercial banks and Savings and Loan Institutions;
  - (iii) the monetary survey;
  - (iv) banking sector prudential indicators;
  - (v) the net foreign assets of the BoA and their components;
  - (vi) comprehensive information on reserve assets that are pledged, collateralized, or otherwise encumbered;
  - (vii) the foreign exchange cash flow of the BoA, including the level of NIR;
  - (viii) daily data on average exchange rates, FX interventions, and FX swaps;
  - (ix) quarterly balance of payments data and updates of balance of payments estimates;
  - (x) quarterly inflation forecasts;
  - (xi) data on government deposits and net domestic financing; and
  - (xii) quarterly data on the stock of foreign currency credit to unhedged borrowers, by bank and economic activity.

- The Ministry of Finance will supply to the Fund:
  - (i) the monthly fiscal tables, including the overall budget deficit, on a modified cash basis;
  - (ii) issuance of treasury bills and bonds by the MoF, including gross value and cash received;
  - (iii) privatization receipts;
  - (iv) information on the contracting, disbursement, and amortization of public debt;
  - (v) detailed information on interest expenses for domestic and external debt;
  - (vi) information on the stock of short-, medium-, and long-term debt;
  - (vii) information on official grants for projects or budget support purposes;
  - (viii) information on the stock of expenditure arrears identified in the APCS, and progress in arrears repayment;
  - (ix) information on energy and non-energy guarantees issued by the general government, including new issuance, drawings, repayments (called and non-called), interest (called and non-called), late returned principal and interest, separately for domestic versus external as well as energy versus non-energy guarantees; and
  - (x) data on local government spending, by type of expenditure.

- The General Directorate of Customs will supply to the Fund:
  - (i) detailed data on customs revenues collected.

- The General Directorate of Taxation will supply to the Fund:
  - (i) detailed data on tax revenues collected;
  - (ii) information on progress in implementing business restructuring and IT reforms;
  - (iii) data on the stock of VAT refunds claimed, refund arrears, and refunds paid out; and
  - (iv) quarterly performance metrics, including rate of on-time filing (per major tax type), stock of tax arrears (per major tax type), percentage of refund claims processed on time, number and total value of approved-but-not-yet-paid refund claims, number and total value of in-process-but-not-yet-approved refund claims, share of VAT refunds released without audit, additional tax assessed through audits (all types of audits), and additional tax paid that relates to audit assessments.

- The Albanian Statistical Agency (INSTAT) will supply to the Fund:
  - (i) the consumer price index (CPI) at the aggregate level and for each individual item;
  - (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 “Conjuncture”; and
  - (v) preliminary estimates for quarterly GDP and preliminary estimates for annual GDP disaggregated by 35 sectors and distinguishing between the observed and unobserved economy.

*Source: IMF staff report text provided in the content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16289.pdf_