Albania and the IMF

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Albania—Letter of Intent,
Memorandum of Economic and Financial Policies,
and Technical Memorandum of Understanding

Tirana, 12 June, 2002

The following item is a Letter of Intent of the government of Albania, which describes the policies that Albania intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Albania, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

1. Since 1998, Albania has made much progress in restoring macroeconomic stability and in implementing market-oriented structural reforms. We have benefited from close cooperation with the Fund in the context of our 1998-2001 PRGF arrangement. To further strengthen policy making, we have developed our Growth and Poverty Reduction Strategy (GPRS), which was submitted to the World Bank and the IMF in December 2001, with an update in May 2002.

2. Based on Albania's performance under the previous arrangement and to support our program for the period ahead, as described in the attached Memorandum of Economic and Financial Policies (MEFP) and consistent with the GPRS, we are hereby requesting a new three-year arrangement under the Poverty Reduction and Growth Facility, in an amount equivalent to SDR 28 million (57 percent of quota). We have reached understandings with Fund staff on an amended 2002 budget. We have already implemented the prior actions for the presentation of the program to the Board of the IMF.

3. The Government and the Bank of Albania believe that the policies outlined in the attached memorandum are sound basis for achieving the targets of the program. During the period of this arrangement, Albania will consult with the IMF on the adoption of any further measures that may be appropriate, at the initiative of the Government or Bank of Albania or whenever the Managing Director of the IMF requests such a consultation. In addition, the authorities will provide the IMF with such information as the IMF may request in connection with the implementation of the program. The Government and the Bank of Albania will conduct with the Fund two reviews of the first year of the program supported by the new arrangement, the first not later than end-January 2003 and the second before end-July 2003.

4. Moreover, after the period of this arrangement and while Albania has outstanding financial obligations to the IMF arising from loan disbursements under this arrangement, Albania will consult with the IMF from time to time, at the initiative of the Government or Bank of Albania or whenever the Managing Director of the IMF requests consultation on Albania's economic and financial policies. These consultations may include correspondence and visits of officials of the IMF to Albania or of representatives of Albania to the IMF.

Sincerely yours,

Pandeli Majko   Kastriot Islami   Shkëlqim Cani
Prime Minister   Minister of Finance   Governor, Bank of Albania

Memorandum on Economic and Financial Policies of the
Government of the Republic of Albania for 2002–03 Under a
Three-Year Arrangement Under the Poverty Reduction and
Growth Facility (PRGF)

I. Background

A. Introduction

1. This memorandum describes our economic program for the period April 2002- March 2003, based on Albania's Growth and Poverty Reduction Strategy (GPRS). It also outlines our medium-term strategy for the period 2002-05, for which support is being requested from the IMF under a new three-year PRGF arrangement.

2. Under the previous Fund-supported program, we made considerable progress in achieving macroeconomic stability and financial sustainability, as well as in moving toward a market-based economy. Notwithstanding an often adverse regional environment and episodes of political instability, output growth has been strong, inflation has remained under control, and the external reserves position has improved markedly. Key elements underlying this performance include enhanced fiscal management—especially in regards to revenue administration—wide-ranging structural reforms, and the Bank of Albania's (BoA) steadfast pursuit of price stability.

3. Despite some unfavorable developments since late-2001, stemming from political events, severe weather conditions, and a weakened global environment, our commitment to reform has remained firm. We have made efforts to reverse the temporary slippages in the legislative agenda and revenue collection. However, the privatization of Albtelekom, initially scheduled for 2002, has been delayed because of the lack of interest by foreign investors, partly reflecting a further weakening of the international telecommunication sector. The 2002 budget will be revised in response to these shocks (prior action). Accordingly, the macroeconomic framework presented in Table 1 updates the outlook as presented in the December 2001 GPRS document, and the revisions are explained in our May 2002 supplement to the GPRS.

4. In spite of high growth in recent years, poverty remains widespread and unemployment high. Based on a poverty diagnosis conducted in the context of the GPRS, and using1998 data, about one-third of Albanians are poor, with poverty being particularly pervasive in rural areas. We are committed to working to reduce the incidence of poverty by promoting sustainable and inclusive economic growth. The key challenge in these efforts will be the establishment of strong institutions that will facilitate private sector development and ensure an equitable application of the law.

5. The GPRS recognizes that inclusive growth and poverty reduction require a sound macroeconomic framework, and sustainable fiscal and financial policies. In this regard, it aims at balancing increased spending to reduce poverty against the need to ensure macroeconomic stability. The main priorities under the GPRS in support of poverty reduction include: (i) reorienting expenditure toward poverty-sensitive areas—in particular health and education, where indicators have deteriorated sharply since the early 1990s; (ii) improving vital infrastructure, especially the provision of electricity and water, which are key requirements for both the welfare of households and supporting productive capacity; (iii) strengthening governance and public administration, including reform of the civil service; (iv) deepening market institutions and fostering an economic environment conducive to private investment, notably FDI; and (v) promoting rural development, as well as agricultural and food-processing activities.

6. We made concerted efforts—with assistance from the international community-to make the development of the GPRS a participatory process. A framework for dialogue with civil society, local government, and the private sector was set up and civil society advisory groups were established in the areas of education, health, labor and social affairs, and agriculture/rural development. To coordinate these activities, a National Civil Society Advisory Council and a GPRS technical secretariat were formed. A GPRS core donors' group will continue to meet on a monthly basis to discuss GPRS-related developments. The GPRS was submitted to the IMF and the World Bank in December 2001, and a brief supplement reflecting the updated macroeconomic framework for the strategy was sent in May 2002.

B. Recent Economic Developments

7. Economic performance in 2001 and thus far in 2002 has been mostly favorable, despite electricity shortages and harsh winter weather. GDP growth decelerated to about 6½ percent in 2001, somewhat lower than initially expected, owing to weak agricultural growth and the worsening electricity situation, while construction and private sector manufacturing remained strong. Registered unemployment declined from 17 percent at end-2000 to 14½ percent at end-2001. Reflecting principally the electricity shortages and bottlenecks in the supply of agricultural products, inflation rose to around 7 percent in the first quarter of 2002, well above the target range. The conversion of euro-area cash at end-2001 and large deposit withdrawals from the two largest banks in March and April 2002—triggered by unfounded rumors of solvency problems—led to a sizable increase in domestic currency in circulation. To counter resulting depreciation risks and to moderate inflationary pressures, the BoA has raised the repo rate by 1½ percentage points so far during 2002. The current account deficit narrowed in 2001 to 6¼ percent of GDP, from 7¼ percent of GDP a year earlier. The widening trade deficit was more than accommodated by rapid growth in private remittances in the last quarter of 2001, as well as an increase in net tourism receipts.

8. Fiscal performance has been mostly on track since the end of the previous program, but end-2001 tax revenue collection was Lek 1.8 billion below target. Nontax revenues also fell short of the target by Lek 4.2 billion. We exercised spending restraint to ensure that, for 2001 as a whole, the overall and domestically financed deficits (respectively, 8.5 percent and 3.1 percent of GDP) remained within the budget. We have taken strong measures to prevent further tax revenue slippages in 2002 (see below). Nonetheless, some problems remain, in particular with excise collection in the customs department, and total revenue for the first quarter reached only 98 percent of budget.

9. We have proceeded with the reform of tax and customs administration. In the area of customs administration, we have established regional customs directorates and enhanced cooperation with the EU-financed customs assistance mission (CAM-Albania) and the Tax Directorate to improve the valuation of imports and fight underinvoicing. With regard to tax administration, we have provided adequate office space to the Large Taxpayers Unit (LTU), introduced a performance-based reward scheme for tax department staff, and initiated controls on the use of cash registers. In addition, an independent taxpayer appeals commission has been set up and the appeals procedure has been simplified.

10. We have made progress in structural reform, in particular in relation to the electricity sector.

  • A two-tier tariff system was introduced on January 1, 2002, doubling electricity tariffs for household consumption in excess of the threshold level of 300 KWh. The new system aims to: (i) encourage the shift from electricity to LPG for heating and cooking, and (ii) protect the poor by maintaining a low price below the threshold—which is above the average consumption of households with income below the poverty line. In consultation with the World Bank, a new two-year energy sector action plan was finalized in January 2002, which aims to improve the financial situation of KESH, reduce excessive demand and budgetary subsidies, and increase domestic generating capacity. A donors' meeting in early April endorsed our Power Sector Policy Statement in which we defined our action plan. Following weak electricity bill collection in early 2002, we took strong action to ensure that the end-March target in the action plan was met.

  • The registry on movable property has become operational and, albeit after some delay, in 2002 new laws have been approved on a deposit insurance scheme and the Investment Promotion Agency. To improve public sector transparency and accountability, an Internal Audit Law and a Law on Organization and Functioning of the Council of Ministers have been prepared, and measures have been adopted to increase the transparency of the procurement process and strengthen management and control of treasury operations.

II. Objectives and Policies

A. Macroeconomic Framework

11. Our macroeconomic policies for 2002-05 will aim at supporting robust GDP growth, while maintaining low inflation and ensuring financial viability (see Table 1). To sustain annual GDP growth of around 7 percent over the medium term, we intend to proceed rapidly with structural reforms, improve governance, and complete the privatization projects described below. The achievement of high sustainable growth is subject to risks, particularly from the uncertain energy situation as well as potentially adverse regional developments. We are confident, however, that the pursuit of rigorous reform of the electricity sector will control the risks emanating from power outages and that our prudent medium-term policy framework will mitigate the impact of external uncertainties. Monetary policy will aim at restoring and maintaining inflation within a target range of 2-4 percent. Fiscal policy will include a continued strengthening of revenue collection, thus allowing simultaneously for increased spending in priority areas and a steady decline in the deficit. Reserve coverage is envisaged to remain at a comfortable level, at or above 4½ months of imports of goods and services, which is prudent given the dependence of the balance of payments on potentially volatile workers' remittances and official transfers, and the disappearance of privatization receipts over the medium term. After an expected widening in 2002, the external current account deficit is projected to narrow by about 3 percentage points of GDP by 2005. A modest amount of additional resources from the international community will be needed to ensure that the balance of payments is fully financed after 2002.

B. Fiscal Policy

12. While reorienting our expenditure policy to support the poverty-reduction objectives identified in the GPRS, we will simultaneously pursue fiscal consolidation to ensure long-term debt sustainability. We aim at reducing the overall deficit to 5½ percent of GDP by 2005. This will be mainly accomplished by increasing tax revenue from 16 percent of GDP in 2001 to about 19½ percent of GDP in 2005, largely as a result of continued improvements in tax and customs administration, an expanded tax base and a strong political commitment to fighting fiscal evasion.

13. The revised 2002 budget envisages an overall deficit of 8 percent of GDP—with a ceiling of 3 percent of GDP on domestic borrowing—and targets an increase in tax and customs revenue of 1.1 percent of GDP. In line with the ceilings envisaged under the program (Table 1), foreign financing will consist mainly of resources provided on concessional terms by international organizations and bilateral donors. The budget has been revised to take into account lower privatization receipts, which are now programmed at 0.2 percent of GDP, compared with the original 1.6 percent of GDP. To this end, the reserve and contingency funds and expenditures in nonpriority areas have been cut on the basis of contingency measures identified at end-2001. The remaining allocation for the reserve and contingency funds will be used only in emergencies and after discussion with Fund staff. In addition, the use of the Lek 1 billion remaining in the reserve fund is strictly conditional on realization of the nontax revenues projected in the revised budget. More generally, given the uncertainties involved in projecting revenues in general, great caution will be exerted in executing the budget.1 Parliamentary approval of a revised budget will be a prior action for Board consideration of the requested PRGF arrangement.

14. In view of the unusually severe hydrological conditions and the availability of highly concessional foreign financing, and conditional on KESH's good performance, subsidies for electricity imports in 2002 are allowed to be higher than in the original budget. Consistent with World Bank advice, the increase in imports will help offset the shortfall in domestic production and restore the water reservoir—in order to reduce the likelihood of future electricity crises. The additional subsidies will be made available to KESH on a quarterly basis, proportional to the planned quarterly additional imports, on the condition that: (i) the previous quarter's targets on collection and reduction of losses have been strictly met; and (ii) the total cumulative electricity supply to the transmission network for the year up to the end of each quarter does not exceed the amounts foreseen in the agreed action plan.2 The additional imports will be financed by a highly concessional foreign loan. Delays in the disbursement of the designated loan will not increase the ceiling on domestic borrowing.

15. To ensure achievement of our fiscal targets, we have developed a medium-term revenue framework. This framework aims at modernizing our tax and customs administration and fighting fiscal evasion and smuggling more effectively. Key features of this strategy are: (i) widening the tax base by increasing the number of registered taxpayers and reforming tax policy; (ii) fully computerizing and restructuring the Tax Department along functional lines; (iii) adopting a comprehensive human resources policy, including training for tax inspectors and offering merit-based reward schemes; (iv) developing the internal audit function to ensure continuous quality control of operations and valuation in accordance with the customs code; (v) improving coordination/information exchange both between the Tax and Customs Departments as well as between the social insurance institutes and the Tax Department; (vi) adopting comprehensive taxpayer education programs to promote voluntary compliance; and (vii) improving relations with taxpayers, including through the adoption of a new and more independent taxpayer appeals process. Also, we intend to implement a comprehensive plan to improve public enterprises' financial performance, reduce their dependence on budget subsidies, and ensure tax compliance.

16. Within this framework, we have identified specific measures to attain the targeted increase in tax revenue in the 2002 budget, while continuing to improve relations with taxpayers.

In the area of customs administration:

  • Following the development and implementation of an action plan to improve valuation of imports with assistance from CAM-Albania, we will continue to update the reference price file regularly.

  • The internal audit unit will continue to produce quarterly reports on the functioning of customs systems, especially the implementation of valuation in accordance with the customs code, including specific recommendations for the remedy of identified shortcomings; the Director-General will also continue to prepare quarterly reports on the implementation of corrective measures based on these reports (structural benchmark).

  • We will pass legislation to close down duty-free shops in all land crossing points in border areas, to reduce smuggling and fiscal evasion, by end-September 2002 (performance criterion).

  • The Customs and Tax Departments will cooperate more closely to fight fiscal evasion through underinvoicing. To this end, a joint working group has been created to systematically investigate undervaluation of imports through controls and cross-checks of real market prices. A report on the results will be prepared and an action plan to combat this problem effectively will be adopted by end-June (structural benchmark).

In the area of tax administration:

  • We will continue to improve tax administration, including through the implementation of merit-based reward schemes for tax inspectors and improvements in the operation of the LTU, inter alia, by strictly enforcing the requirement of all large taxpayers to report to it.

  • We will aim to increase the number of registered taxpayers to 57,000 in 2002, starting from a level of 47,000 at end-2001 (structural benchmark).

  • We will prepare quarterly reports on the controls of the use of cash registers and penalties imposed by the Tax Department on companies found to be in violation (structural benchmark).

  • To improve relations with taxpayers further and ensure the fair and careful application of tax legislation, we will establish taxpayer service centers in the tax department and each local tax branch. The blocking of bank accounts for securing the payment of tax liabilities will be executed in accordance with the law and only after prior communication.

  • To enhance the effectiveness of the collection of personal income taxes and social security contributions, we will enhance cooperation with the Social Security Institute (SSI), for example, through frequent information exchange on SSI contributors' and taxpayers' identities and joint enforcement measures.

In the area of tax policy:

  • We will form a working group involving the Ministry of Environment to develop new environmental taxes, with a view to introducing them by September 1, 2002 (structural benchmark).

  • We will introduce a tax on the ownership of agricultural land by October 1, 2002, thereby raising revenue for local governments (structural benchmark).

17. Over the program period, we will reorient expenditures, in line with expenditure priorities identified in the GPRS. In particular:

  • Between 2002 and 2004, we intend to increase expenditure allocations for health and education by about 30 percent and 20 percent in real terms (from 2.8 percent of GDP to 3.2 percent of GDP and from 3.5 percent of GDP to 3.7 percent of GDP, respectively). Within these categories, nonwage recurrent expenditure on operations and maintenance is to expand the most, by more than 15 percent annually (in nominal terms). In order to address poverty more effectively, we will refocus health and education expenditures on rural areas and toward improving the quality of primary education and health care. Specific measures in 2002 to improve the access of the poor to health care are the construction or rehabilitation of local health centers and ambulatory clinics as well as the expansion of counseling services for young mothers.

  • The quality and motivation of teachers and health care workers will be strengthened by reducing wage differentials vis-à-vis the private sector, increasing wage differentiation within these sectors, and conducting specific training programs for teachers. To this end, following consultation with the World Bank, the 2002 budget envisages salary increases in the health and education areas by 12 percent as of July 1, 2002. A similar increase will be granted to the judiciary, to improve governance.

  • In line with the civil service reform strategy, the average salary of top-ranking civil servants was increased by around 60 percent in January 2002, to enhance motivation and retain high-skilled personnel. The overall salary increase for the public sector, however, will be limited to 8 percent in 2002, so that the total budgetary allocation for personnel expenses will not rise by more than 10 percent. To further assist efforts at building a more effective public administration, a database on all employees will become fully functional before the end of the year.

  • Allocations for social assistance (ndihma ekonomike) will be maintained as a percent of GDP, and we will aim to improve targeting.

  • A comprehensive reform of the pension fund to reduce budgetary transfers and ensure its long-term financial viability is being developed and adopted in cooperation with the World Bank. Specifically, we raised the contribution ceiling from three to five times the minimum wage (in January 2002, effective February 2002) and we will increase the retirement age by six months (by July 2002) and reduce contribution rates by four percentage points (in July 2002). In the rural scheme, we raised per capita contributions from Lek 1,000 to Lek 2,400 (in January 2002) to finance the planned increase in rural pension benefits. As a first step, and in line with our poverty-reduction strategy, rural pensions will increase by 25 percent in July 2002. To better motivate collections of payroll taxes in rural areas, we plan to introduce by June 1, 2002, a new incentive scheme for rural inspectors that foresees traditional compensation linked to collections. As a result of these measures, we expect the system to move toward financial sustainability and the subsidies to the pension fund to decline gradually over the program period. The initial budgetary impact for 2002 is expected to be neutral.

  • The subsidy to the electricity company will be phased out by end-2004 in the context of the reform of the electricity sector (see below).

  • We will give local communities more decision-making authority within our program of decentralization, with further increases in grants to local authorities envisaged in the 2002 budget. We will ensure that the pace of decentralization is in line with progress in developing administrative capacity.

18. We will also improve expenditure management. To enhance the reporting of foreign-financed capital expenditures, we will sensitize donors on the need to provide timely information on disbursements and expenditures made under their projects, at a meeting planned for May 2002. At the same time, we will issue a new regulation requiring PIUs in the line ministries to report systematically on their projects, penalizing noncompliance. We will continue with computerizing regional treasury offices in order to improve reporting.

19. With regard to arrears within the public sector, we have carried out, with Fund assistance, a preliminary inventory of all outstanding inter-enterprise arrears and arrears to the Tax and Customs Departments and the Social Security Institute. By end-September 2002, we will finalize the recording of these arrears, complete the reconciliation process, and sign bilateral Memoranda of Understanding indicating the amount of net overdue payables/receivables as of December 31, 2001 (structural benchmark). Before end-October and in consultation with Fund staff, we will determine the amount of arrears that can be cancelled through government-assisted multilateral repayments of arrears and follow the proposed strategies for promoting the full and timely payment of all obligations contracted thereafter (structural benchmark). We are also developing a strategy for restructuring the water supply sector, in consultation with donors.

C. Monetary Policy

20. The BoA will continue to conduct monetary policy with the objective of restoring and maintaining inflation within a 2-4 percent range, while safeguarding financial sector stability. The re-emergence of inflationary pressures in early 2002 and the further risks to inflation and exchange rate stability from the large recent deposit withdrawals necessitated an increase in official interest rates and the BoA stands ready to increase the rate further if necessary. The BoA will continue to conduct its monetary operations in the context of a flexible exchange rate regime, while smoothing excessive fluctuations.

21. In order to improve the effectiveness of its monetary policy framework, the BoA will continue to strengthen its analytical capacities. While the BoA intends to move to a formal inflation targeting regime over the medium term, the switch is not intended to take place within the program period, during which the focus will be on developing the necessary supporting framework. Specifically, the BoA will strengthen data collection, improve the quality of its monthly monetary policy report, conduct research on the determinants of inflation, and further refine its policy instruments, with technical assistance from the Fund's Monetary and Exchange Affairs Department (MAE).

22. The proposed monetary program is consistent with the inflation objectives, and a reserves to import ratio of about 4½ months. The program assumes that financial stability will be maintained, but with no rapid reversal of the decline in bank deposits. This is reflected in the low growth of broad money (which excludes foreign currency cash), projected at 5½ percent at end-2002, and a continued high share of domestic currency cash. It is also reflected in a higher (relative to earlier projections) contribution by the BoA in financing the domestic component of the fiscal deficit. Targets for net international reserves and net domestic assets of the BoA have been set in accordance with this framework, and will serve as performance criteria under the program.

23. The BoA will continue to strengthen banking supervision, as commercial banks diversify their activities and lending picks up. In order to enhance banks' ability to manage risks more appropriately, we will begin to offer, with assistance from MAE, specific training programs for bankers on the use of modern techniques of risk management. Training will also be provided to supervisors, in the context of the new Supervisory Development Plan developed in consultation with the World Bank. The BoA will use its legal tools in order to ensure compliance with prudential regulations. Furthermore, the Savings Bank will not be allowed to resume its lending activities until it has been privatized.

24. Based on the results of the March 2002 safeguards monitoring visit of the IMF, the BoA is in the process of strengthening its control, accounting, and auditing systems. Efforts are guided by a work plan adopted for implementing the recommendations of the report. The BoA will continue to cooperate with the safeguards policy and provide updated documents and data as necessary.

D. Structural Policies

25. Structural reforms in support of sustainable growth and poverty reduction will focus on four key areas: completion of the remaining steps on the privatization agenda; comprehensive reform of the electricity sector; improvements in the financial sector; and measures to improve the environment for private sector activity. The first program review, scheduled for January 2003, will focus on the electricity sector and the privatization process.

26. Under our privatization program, the fixed-lines telecommunications company and the largest state-owned bank are the principal remaining entities to be privatized.

  • In relation to Albtelekom, we will improve the marketability of the company and settle the remaining unresolved legal and financial claims by end-September (structural benchmark), before setting new deadlines for the privatization. Moreover, we will improve the company's management, strengthen coordination of the privatization process, and clarify responsibilities within the government in this regard.

  • Following the announcement of the privatization tender for the Savings Bank in June 2001, a short-list of interested banks was compiled in April 2002. These banks have been invited to submit detailed offers and the selection of the buyer and the initiation of negotiations will take place by end-June 2002 (structural benchmark). In the meantime, we will continue to reduce reliance on the Savings Bank for carrying out fiscal functions and by October 2002 we will prepare a program to promote the continued provision of banking services throughout the country.

  • The state-owned insurance company INSIG will be privatized based on a strategy developed in consultation with IFIs.

  • In the oil sector, we will bring SERVCOM's strategic and nonstrategic parts to the point of sale before end-2002 and aim to finalize privatization of the refinery by end-2002.

27. The performance of the electricity sector remains a significant threat to growth and macroeconomic stability, and electricity sector reform is a key priority. Reforms will focus on diversifying energy supply sources, curtailing excessive demand (especially for heating), and improving the financial position of the electricity company, KESH. Key elements of the strategy are tariff reform and improvements in bill collection, including the introduction of effective measures for reducing theft, and the promotion of alternative energy sources and energy conservation. Based on these efforts, the government subsidies to KESH were initially planned to be reduced to Lek 3.8 billion in the 2002 budget. However, as explained above, severe and unexpected constraints to domestic production have since necessitated additional support. Nevertheless, we remain fully committed to phasing out subsidies for electricity by the end of 2004, with no subsidies to be allocated in the 2005 budget. As specific steps within our 2002-03 policy program:

  • We will improve bill collection and reduce power losses based on the new electricity sector action plan. The end-2001 targets envisaged under the previous action plan were met, and we will ensure that the cumulative end-April 2002 targets under the new plan will also be met (prior action).

  • We have asked the Prosecutor General's office to vigorously prosecute cases of electricity theft submitted by KESH. We are also conducting a review of building licenses granted since October 2000 to ascertain that, as required, all buildings are equipped with central heating systems.

  • We have initiated, in cooperation with the World Bank, a major study of the energy sector, to be finalized before end-2002 (structural benchmark), with the aim of preparing an electricity tariff reform based on long-run marginal costs. We will, on the basis of an evaluation of the impact of the estimated tariff rates on the total expenditure on energy of households, and in consultation with the World Bank, undertake measures to alleviate the impact of higher energy costs on vulnerable households.

  • Regarding power generation, we will only proceed with the Bushati project in consultation with the World Bank and after assessing its environmental impact. We will first focus our efforts on expanding the capacity for thermal power production with assistance from the World Bank and other donors.

28. We are committed to improving the infrastructure of our financial system to promote a better allocation of resources.

  • The Law on Deposit Insurance has been approved and the necessary institutions will be prepared by January 2003.

  • We have improved the accessibility of the BoA's window for selling treasury bills, have also opened such windows in its local branches, and are helping the post office to start the sale of treasury bills. In addition, we will start issuing government securities with a maturity of at least two years by end-June 2002 (structural benchmark).

  • In the context of privatizing INSIG, the state-owned insurance company, we will strengthen significantly the supervision of the insurance market, with technical assistance provided by IFIs.

  • The Bankruptcy Law was submitted to Parliament in March 2002. Implementation of the law will be supported by a program funded by external donors.

  • We will adopt improvements to the Money Laundering Law during 2002 and strengthen its implementation.

  • We intend to improve the interbank settlement system, with the introduction of RTGS before end-2002, supported by the World Bank.

29. We will increase our efforts to create a more conducive environment for attracting foreign investors. While foreign direct investment flows have risen sharply in recent years, these have mainly been associated with the privatization process; other FDI remains below levels elsewhere in transition economies. We will therefore establish, in cooperation with FIAS, an investment promotion agency (IPA) and conduct a study of administrative barriers by end-December 2002. By mid-2002, we will also establish a mediation center with the aim of improving relations with the business community by providing alternative forms of conflict resolution. In order to create better conditions for the development of the agricultural sector, we will prepare a law to regulate private ownership of land, complete the registration of most lots by 2004, and establish offices for land in every district.

30. We will improve further the quality and coverage of economic statistics. Following the IMF's Statistics Department technical assistance mission in early 2002, INSTAT has started publishing a revised CPI—with updated weights in the basket based on recent household budgetary survey. The new PPI will be also published in 2002. However, publication of the first official GDP estimates for 1996-2000 has been delayed due to problems in retaining qualified staff at INSTAT, and is now scheduled for end-2002 To help upgrade our macroeconomic analysis, the Ministry of Finance, the Bank of Albania, and INSTAT will establish a system for prompt data sharing, involving other ministries as appropriate (in particular, the Ministry of Agriculture).

E. External Policies

31. With the envisaged foreign support, we expect that the balance of payments position will remain sustainable. However, Albania's sizeable investment and infrastructure needs and, in the near term, the need for electricity imports, will put pressure on the current account deficit, which is expected to amount to nearly 8¼ percent of GDP in 2002. By 2005, the current account balance is expected to improve by about 3 percentage points. While private remittances are expected to increase further over the medium term, they should moderate in 2002 with a possible reversal of the exceptional inflows at end-2001. Inflows of foreign direct investment and bilateral and multilateral support are expected to finance the current account deficit, although moderate financing gaps are projected to continue into the medium term that are expected to be filled by other donors, including the World Bank. We intend to ensure the sustainability of foreign borrowing by observing ceilings on medium- and long-term nonconcessional borrowing (performance criteria).

32. We will intensify our efforts to regularize relations with external creditors. Despite our progress in the past 12 months toward finalizing rescheduling agreements, a significant number of arrears remain outstanding. Delays in finalizing domestic processes for the rescheduling agreement with Russia have prevented the agreed payments schedule from being observed, resulting in the accumulation of new sovereign arrears. These amounts will be eliminated prior to Board consideration of the requested PRGF arrangement (prior action). We are committed to eliminating our external arrears to official creditors during the period of the requested PRGF arrangement. As a first step, we are preparing a comprehensive strategy for dealing with these arrears. In this context, the Ministry of Finance, with assistance from the BoA, will prepare quarterly reports updating information on the stock of arrears, and identifying plans for and progress in the clearance of these arrears. The report for the first quarter of 2002 was completed in May (prior action) and we will complete reports for each quarter of the remainder of 2002 with a lag of one month (structural benchmarks). At the time of the first review, we will discuss specific targets for the clearance of arrears, including those nonconvertible currency arrears, with a view to working toward acceptance of our obligations of Article VIII, Sections 2, 3, and 4 of the Fund's Articles.

33. We are committed to maintaining a liberal trade regime and enhancing regional cooperation. Since 1998, the top tariff rate has been cut from 30 percent to 15 percent, and further cuts are foreseen in line with our WTO commitments. We are in the process of negotiating a number of regional free trade agreements and, under the terms of the Memorandum of Understanding signed in June 2001, we are working toward concluding these negotiations by end-2002.

F. Program Monitoring

34. The first year of the three-year PRGF-supported program will be monitored on the basis of quantitative performance criteria for end-September 2002 and end-March 2003, and quantitative benchmarks for end-June and end-December 2002 (see Table 2). The quantitative targets are set on a cumulative basis from end-2001, and the details are set out in the Technical Memorandum of Understanding. Prior actions, structural performance criteria, and benchmarks are presented in Table 3. The quantitative performance criteria for end-March 2003 will be set at the time of the first program review, scheduled to be completed by end-January 2003 This review will focus on the electricity sector and the prospects for tax and privatization receipts, while the second review, to be completed in July 2003, will focus on financial sector developments. During the program period, Albania will not impose or intensify restrictions on the making of payments and transfers for current international transactions, or introduce or modify multiple currency practices, or conclude bilateral payments agreements inconsistent with Article VIII, or impose or intensify import restrictions for balance of payments reasons.

Table 1. Albania: Basic Indicators and Macroeconomic Framework, 1998–2005
    1998 1999  2000    2001
  Dec01 Proj.   Proj.

    (Percent change)

Real GDP

8.0 7.3 7.8   6.5   7.0 6.0   7.0   7.0   6.5

Retail prices (avg.)

20.9 0.4 0.0   3.1   3.0 5.3   3.0   3.0   3.0

Retail prices (end-period)

8.7 -1.0 4.2   3.5   3.0 3.9   3.0   3.0   3.0
    (In percent of GDP)

Saving-investment balance1

  Foreign saving2 6.1 7.3 7.2   6.3   8.2 8.1   7.1   6.3   5.4
  Domestic saving 9.9 9.5 11.4   13.1   14.2 12.7   15.4   16.7   18.6
     Public3 -5.2 -4.0 -2.6   -1.2   -0.4 -0.4   1.0   1.8   2.7
     Private 15.1 13.5 14.2   14.3   14.7 13.0   14.4   14.9   15.9
  Investment 16.0 16.8 18.6   19.4   22.4 20.8   22.5   23.0   24.0
     Public 5.2 7.4 6.5   7.3   8.0 7.6   8.2 8.3   8.3
     Private 10.8 9.4 12.1   12.1   14.4 13.2   14.3 14.7   15.7

Fiscal sector

  Revenues 20.3 21.3 22.4   23.0   24.1 24.2   25.0   25.8   26.5
     Tax revenue 12.3 12.9 15.6   15.9   17.2 17.1   18.0   18.7   19.4
  Expenditures 30.7 32.7 31.4   31.5   32.5 32.2   32.2   32.3   32.1
     Primary 22.9 25.7 25.7   27.1   28.8 28.4   28.4   28.6   28.7
     Interest4 7.8 7.0 5.7   4.3   3.7 3.8   3.8   3.7   3.4
  Overall balance -10.4 -11.4 -9.1   -8.5   -8.5 -8.0   -7.2   -6.5   -5.6
  Primary balance -2.6 -4.4 -3.4   -4.2   -4.8 -4.2   -3.4   -2.8   -2.2
  Primary balance (excl. foreign
      financed projects)
0.3 -1.0 -0.4   -1.0   -0.8 -0.2   0.4   1.1   1.7
  Domestic borrowing -6.4 -5.2 -3.2   -3.1   -2.6 -3.0   -2.2   -1.7   -1.8
  Privatization receipts 0.0 0.2 1.7   2.1   1.6 0.2   1.3   1.3   0.2
  Foreign finance -4.0 -6.1 -4.3   -3.3   -4.2 -4.9   -3.7   -3.5   -3.6
  Public Debt 64.3 64.1 72.1   69.0   63.2 62.9   61.6   59.8   58.6
     Domestic5 32.4 35.1 41.9   40.9   39.8 39.6   38.0   36.1   34.8
     External (including publicly
31.8 29.1 30.2   28.2   23.4 23.3   23.6   23.7   23.9

Monetary indicators

  Broad money growth (in percent) 20.7 22.3 12.0   19.9   11.4 6.0   9.3   9.3   9.3
  Private credit growth (in percent) 14.7 29.4 26.9   43.1   28.5 28.8   29.3   . . .   . . .
  Velocity 1.9 1.7 1.6   1.5   1.6 1.6   1.6   1.6   1.6
  Interest rate (3-mth T-bills,
20.4 14.8 7.8   8.0   . . . . . .   . . .   . . .   . . .
    (In millions of U.S. dollars)

External sector

  Trade balance7 -621 -663 -821   -1,027   -1,039 -1,072   -1,116   -1,180   -1,229
     (in percent of GDP) -20.4 -18.0 -21.9   -25.0   -22.1 -23.4   -22.3   -21.3   -20.2
  Current account balance -187 -270 -270   -258   -384 -372   -357   -348   -330
     (in percent of GDP) -6.1 -7.3 -7.2   -6.3   -8.2 -8.1   -7.1   -6.3   -5.4
     (in percent of GDP; incl.
      official transfers )
-3.2 -3.4 -4.0   -3.4   -5.9 -5.9   -4.9   -4.4   -3.8
  Official transfers 89 139 111   119   106 104   109   104   98
     (in percent of GDP) 2.9 3.8 3.0   2.9   2.3 2.3   2.2   1.9   1.6
  Gross international reserves 384 485 608   737   799 750   828   923   973
     (in months of imports of
      goods and services)
3.7 3.8 4.3   4.7   4.7 4.5   4.6   4.8   4.7
  (relative to external debt service) 21.8 29.3 25.8   23.5   12.7 11.9   14.6   13.7   13.0
  (in percent of broad money) 22.6 22.4 26.4   25.6   26.4 26.1   26.3   26.7   25.6
  Change in real effective
      exchange rate
18.3 12.5 7.0   . . .   . . . . . .   . . .   . . .   . . .
Memorandum item:                            
Nominal GDP (in millions of lek) 460,631 506,205 539,210   590,237   657,030 658,753   727,218   803,790   884,115

Sources: Albanian authorities; and Fund staff estimates and projections.
1Estimated based on indirect information in the absence of national accounts.
2Current account excluding fficial transfers.
3Revenue minus current expenditure.
4Including interest payments for bank restructuring.
5Including bonds for bank restructuring (lek 24.6 bn for 2000).
6Includes arrears, with the exception of those transferable ruble arrears for which the value is subject to reconciliation and rescheduling agreements have yet to be reached with creditors.
7For 1999 excluding imports of direct humanitarian aid related to the Kosovo crisis.

Table 2. Albania: Quantitative Performance Criteria and Indicative Targets for 20021 (Cumulative changes from end-December 2001)

  (In billions of Lek)
1. Ceiling on net domestic credit to the government3 237.5   3         4.5         9.5        19.5
2. Ceiling on net domestic assets of the BOA   78.1     6.8       9     12     17
3. Indicative target for tax revenues 92   22        49     78   110
4. Indicative target for revenues collected by
    Customs Department
51   11        24     39     56
  (In millions of U.S. Dollars)
5. Floor for net international reserves of
    the BOA4
542.6 4         3       4     16
6. Ceiling on contracting or guaranteeing of public
    and publicly-guaranteed non-concessional
    external debt5
. . . 26.2   100   130   160
       Of which: 1-5 years . . . 0       0       0       0
7. Ceiling on the public and publicly-guaranteed
    external debt stock with original maturities up to
    and including 1 year6
. . . 0       0       0       0
8. Nonaccumulation of new external payments
    arrears, excluding interest on pre-existing arrears6
. . .   . . .       0       0       0

1The performance criteria and indicative targets envisaged under the program, and their adjustors, are defined in the Technical Memorandum of Understanding (TMU).
2Performance criteria, except for tax revenues and revenues collected by the Customs Department, which are indicative targets.
3The targets for 2002 assume privatization receipts of Lek 1.1 billion and budget support of Lek 9 billion (evaluated at an exchange rate of 144 lek per dollar).
4The targets are derived using the end-December 2001 exchange rates.
5This performance criterion applies to the contracting or guaranteeing by the central government or the Bank of Albania as specified in the accompanying TMU.
6These performance criteria apply on a continous basis.

Table 3. Albania: Prior Actions, Structural Performance Criteria, and Structural Benchmarks Under the First Annual PRGF Arrangement
Measures   Deadline/Status

A. Prior Actions    
  1. Meet the targets to end-April 2002, on a cumulative basis, consistent with the
      two-year action plan for the electricity sector reform (MEFP, ¶ 27; and GPRS,
      Section IV.F.3).
  2. Prepare the first comprehensive quarterly report updating the stock of external
      arrears as of end-March 2002, and identifying progress in, and plans for the
      clearance of external arrears (MEFP, ¶32).
  3. Finalize domestic process for the external arrears rescheduling agreement with
      Russia and pay the already scheduled amounts (interest and principle)
      (MEFP, ¶32).
  4. Parliament to approve amendments to the 2002 budget consistent with the
      revised Memorandum of Economic and Financial Policies (MEFP, ¶13).
B. Performance Criteria    
  1. Parliament to pass legislation to close down duty-free shops at all land crossing
      points in border areas to reduce scope for smuggling and fiscal evasion
      (MEFP, ¶16).
  End-September 2002
C. Structural Benchmarks    
  1. Resolve all of Albtelekom's financial and legal disputes in preparing it for
      privatization (MEFP, ¶26; and GPRS, Section IV.F.4).
  End-September 2002
  2. Internal Audit Unit to produce quarterly reports on the functioning of customs
      system, including specific recommendations for the remedy of identified
      shortcomings, and Director-General to send reports on corrective measures
      taken by the Customs Department (MEFP, ¶16; and GPRS, Section IV.C).
  3. The Tax Department to prepare quarterly reports on the controls of the use of
      cash registers and penalties imposed on misusers(MEFP, ¶16; and GPRS,
      Section IV.C).
  4. Draft and implement an action plan jointly prepared by Tax and Customs
      Departments to reduce fiscal evasion through underinvoicing (MEFP, ¶16; and
      GPRS, Section IV.C).
  End-June 2002
  5. Extend the tax base through (MEFP, ¶16):    
  a) introducing environmental taxes (by September 1, 2002) and a tax on the
    ownership of agricultural land (by October 1, 2002); and
  b) increasing the number of registered taxpayers from 47,000 at end-2001 to
    57,000 at end-2002 (GPRS, Section IV.C).
  End-December 2002
  6. With regard to arrears within the public sector (MEFP, ¶19):    
  a) finalize the recording of inter-enterprise arrears and tax arrears, complete the
    reconciliation process, and sign bilateral memoranda of understanding
    indicating the amount of net overdue payables/receivables as of
    December 31, 2001; and
  b) determine the amount of inter-enterprise arrears that can be cancelled
    through multilateral nettings.
  End-October 2002
  7. Select a buyer for the Saving Bank and initiate negotiations (MEFP, ¶26; and
      GPRS, Section IV.D.2).
  End-June 2002
  8. Finalize a major study of the energy sector with the aim of determining
      electricity tariffs based on long-run marginal costs and phasing out subsidies
      by end-2004 (MEFP, ¶27; and GPRS, Section IV.F.3).
  End-September 2002
  9. Prepare quarterly reports (within one month of the end of each quarter),
      identifying progress in and plans for the clearance of external arrears, and
      updating the stock of external arrears (MEFP, ¶32).
10. In relation to monetary policy and the financial sector (MEFP, ¶28; and GPRS,
      Section IV.D.2):
  a) introduce government securities with a maturity of at least two years;   End-June 2002
  b) promote the sale of T-bills to the public through Albpost and further improve
    the accessibility of the BoA's window for selling T-bills.

1If privatization receipts are higher in 2002 than programmed, up to ½ percent of GDP of the excess will be fully used to pay down domestic debt (in order to offset the increase in borrowing relative to the original budget), as will 25 percent of any additional excess.
2The quarterly collection targets (including payment of arrears) for 2002 are, respectively, 82.9 percent, 90.2 percent, 94.8 percent, and 92.8 percent; the quarterly loss targets are 48.9 percent, 39.1 percent, 34.8 percent, and 41.9 percent; and end-quarter cumulative targets for electricity supply to the transmission network are1,615 GWh, 2,914 GWh, 4,100 GWh, and 5,585 GWh.



Technical Memorandum of Uuderstanting

This memorandum defines the quantitative benchmarks and performance criteria established in the Memorandum of Economic and Financial Policies for April-December 2002 (MEFP).

A. Net Domestic Credit to the Central Government

1. For the purposes of the program, the central government covers the State Budget, the Social Security Institute (SSI), and the Health Insurance Institute (HII).

2. Net domestic credit to the government (NCG) is defined as the sum of credits in lek and in foreign currency, except for onlending of foreign project loans to all parts of the central government as defined above, including Treasury bills and bonds held by the Bank of Albania, domestic commercial banks, and other domestic lenders, less the sum of central government deposits with the banking system (but excluding foreign currency deposits related to foreign financed projects), and the deposits of the SSI and the HII.1 Credits comprise bank loans and advances to the government (excluding advances on profit transfers by the Bank of Albania), holdings of government securities, and negative balances in government deposits with banks.

3. The component of the domestic credit to government in the form of securities will be calculated based on data on their outstanding stock valued at issue price, with the adjustment for the amount held by the units of central government as defined above (in particular, the SSI and the HII). Sales of Treasury bills will be counted excluding the discount. Reported repayments of Treasury bills and other government securities will not include interest payments, either as coupon interest or the discount. Those components of net domestic credit to the government denominated in foreign currencies are to be valued as stipulated in the GFS. Data on other components of credit to government, if any, will be reported by the Bank of Albania.

4. According to the above definition, the level of net domestic credit to government was Lek 237.5 billion at end-December, 2001.2 Gross loans were composed of (i) total outstanding T-bills at issue price in the amount of Lek  241.5 billion, of which Lek  67.8 billion was held by the Bank of Albania, Lek 164.2 billion by commercial banks, and Lek 9.5 billion by nonbank institutions; (ii) other government lek securities, loans, and other claims on government in the amount of Lek 4.0 billion. From these gross loans, the following items were deducted: (i) central government deposits (excluding social security funds) in the amount of Lek 0.9 billion; and (ii) SSI and HII deposits and T-bill holdings in the amount of Lek 7.1 billion.

5. The limits on the change in net domestic credit to the government will be cumulative from end-December 2001.

B. Net Domestic Assets

6. The net domestic assets (NDA) of the Bank of Albania are defined as the difference between reserve money—defined as the sum of currency issue (less lek notes and coins held by the Bank of Albania) and commercial bank reserves held by the Bank of Albania—less the net international reserves of the Bank of Albania (Section C), with all foreign currency assets and liabilities valued in local currency for program monitoring purposes at an exchange rate at end-December 2001. Under this definition, the level of the NDA was Lek 79.4 billion as of end-December 2001. The NDA limits will be cumulative changes from end-December 2001 and will be monitored from the accounts of the Bank of Albania.

C. Net International Reserves

7. Net international reserves (NIR) are defined as reserve assets minus reserve liabilities of the Bank of Albania. Reserve assets are readily available claims of the Bank of Albania on nonresidents denominated in foreign convertible currencies, and held for the purpose of meeting balance of payments financing needs, intervention in exchange markets, and other purposes. They include Bank of Albania holdings of monetary gold, SDRs, Albania's reserve position in the IMF, foreign currency cash, and deposits abroad. Excluded from reserve assets are any assets that are pledged, collateralized, other otherwise encumbered; claims on residents; precious metals other than gold; assets in nonconvertible currencies; illiquid assets; and claims on foreign exchange arising from derivatives in foreign currencies vis-à-vis domestic currency (such as futures, forwards, swaps, and options). Reserve liabilities shall be defined as foreign exchange liabilities to residents and nonresidents of the Bank of Albania, irrespective of their maturity. They include: foreign currency reserves of commercial banks held at the Bank of Albania; all credit outstanding from the IMF; commitments to sell foreign exchange arising from derivatives (such as futures, forwards, swaps, and options);and all arrears on principal or interest payments to commercial banks, suppliers, or official export credit agencies. Excluded from reserve liabilities are the governments foreign currency deposits at the Bank of Albania.3 Reserve assets and reserve liabilities will both be expressed in U.S. dollars.

8. During this program, for monitoring purposes, the exchange rates of the SDR and non-dollar currencies will be kept at their end-December 2001 levels and holdings of monetary gold will be valued at SDR 35 per ounce. Excluded from gross international reserves are holdings of nonconvertible currencies, claims on nonresident financial institutions denominated in nonconvertible currencies, and other claims, which are not readily available.

D. Adjusters for NCG, NDA, and NIR

9. The NCG ceiling is defined on the assumption that privatization proceeds will amount, on a cumulative basis, from January 1, 2002 to:

End-March 2002

Lek 0.116 billion

End-June 2002

Lek 0.116 billion

End-September 2002

Lek 0.406 billion

End-December 2002

Lek 1.119 billion.

In cases when total privatization proceeds exceed of this projection in 2002, the NCG ceiling will be adjusted downward (i) up to ½ percent of GDP, and (ii) by 25 percent of any additional excess of total privatization proceeds. In cases when total privatization proceeds fall short of this projection, the NCG ceiling will be adjusted upward by 50 percent of any shortfall of total privatization proceeds.

The NIR and NDA targets are defined on the assumption that privatization proceeds from abroad will amount, on a cumulative basis, from January 1, 2002 to:

End-March 2002

Lek  0.00 billion

End-June 2002

Lek  0.00 billion

End-September 2002

Lek  0.145 billion

End-December 2002

Lek  0.191 billion.

The NIR floor will be adjusted upward (downward) and the NDA ceiling adjusted downward (upward) by any excess (shortfall) in these receipts.

10. The NCG, NDA, and NIR targets are defined based on the assumption that foreign budgetary and/or balance of payments financing (excluding project and commodity loans) will amount, on a cumulative basis, from January 1, 2002 to:

End-March 2002

US$ 0 million

End-June 2002

US$37 million

End-September 2002

US$54 million

End-December 2002

US$62 million.

In cases when total foreign financing exceeds (falls short) of this projection, the target for the net domestic credit to the government (except in the case of the Italian electricity loan in 2002 up to the assumed amount of US$8.5 million for each of the second, third, and fourth quarters) and the net domestic assets of the Bank of Albania will be adjusted downward (upward), and for the net international reserves upward (downward), with the proviso that the upward adjustment to the NCG and NDA ceilings and the downward adjustment to the NIR floor should not exceed US$15 million4.

11. The NDA ceilings will be also adjusted to reflect the impact of any change in the required reserve ratio of commercial banks with the Bank of Albania.

E. External Debt and Arrears

12. As set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-00/85) August 24, 2000), the term "debt" will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property. Arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

13. The limit on medium- and long-term external debt applies to the contracting or guaranteeing by the central government or the Bank of Albania, of new nonconcessional external debt with an original maturity of more than one year, with sublimits on external debt with an original maturity of more than one year and up to and including five years. It applies not only to debt as defined in paragraph 12 of this memorandum, but also to commitments contracted or guaranteed for which value has not been received. External debt will be considered to have been contracted at the point the loan agreement or guarantee is ratified by the Albanian parliament. Excluded from the limits are refinancing credits and rescheduling operations (including the deferral of interest on commercial debt), credits extended by the IMF, and credits on concessional terms, defined as those with a grant element of at least 35 percent. The grant element is to be calculated using the OECD Commercial Interest Reference Rates (CIRRs): for maturities of less than 15 years, the grant element will be calculated based on six-month averages of CIRRs; and, for maturities longer than 15 years, the grant element will be calculated based on ten-year averages. Debt falling within the limit shall be valued in U.S. dollars at the exchange rate prevailing at the time the contract or guarantee becomes effective.

14. The limit on short-term external debt applies on a continuous basis to the stock of short-term external debt owed or guaranteed by the central government or the Bank of Albania, with an original maturity of up to and including one year. It applies to debt as defined in paragraph 12 of this memorandum. Excluded from the limit are rescheduling operations (including the deferral of interest on commercial debt), and normal import-related credits. Debt falling within the limit shall be valued in U.S. dollars at the exchange rate prevailing at the time the contract or guarantee becomes effective.

15. A continuous performance criterion applies to the nonaccumulation of new external payments arrears on external debt contracted or guaranteed by the central government or the Bank of Albania. External payment arrears consist of external debt service obligations (principal and interest) falling due after March 31, 2002 and that have not been paid at the time they are due, as specified in the contractual agreements. Excluded from the prohibition on the accumulation of new arrears are: arrears arising from interest on the stock of arrears outstanding as of March 31, 2002; and external arrears that are subject to debt rescheduling agreements or negotiations.

F. Tax Revenues

16. Collection of total and the customs department tax revenue will be monitored on the basis of quarterly indicative floors. Tax revenues are defined as revenues collected by the central tax department and/or the customs department.

G. Monitoring and Reporting Requirements

17. Performance under the program will be monitored from information supplied monthly to the Fund by the Bank of Albania and the Ministry of Finance. The following information will be communicated monthly to the Fund by the Ministry of Finance: the summary fiscal table, including the overall budget deficit, on a cash basis, their issuance of Treasury bills including gross value and cash received, and privatization receipts; and by the Bank of Albania; the balance sheets of the Bank of Albania, and the consolidated accounts of the commercial banks; the monetary survey; the net domestic credit to the government; the NFA of the Bank of Albania: the foreign exchange cashflow of the Bank of Albania, including the level of official reserves; daily average exchange rates; trade flows. The following information will be communicated quarterly to the Fund by the Ministry of Finance: information on the contracting and guaranteeing of new debt; information on the stock of short-term, and on medium- and long-term debt; and, with assistance from the Bank of Albania, information on all overdue payments on short-term debt and on medium- and long-term debt. The Bank of Albania will also communicate to the Fund periodic updates of balance of payments estimates.

1Nonbank domestic lenders comprise both firms (including insurance companies) and households. For small lenders, a Treasury bill window is available at the central bank.
2This amount differs from "claims on government (net of deposits)" in the standard monetary aggregates table, as the latter excludes nonbank lending and includes foreign currency deposits.
3This exclusion is justified by current procedures in Albania, whereby the government's foreign currency receipts are deposited in a blocked account at the BoA and the funds are transferred to the government's lek account before being spent. A change in this procedure, would require revisiting the NIR definition.
4For the NCG adjuster, the lek equivalent of deviations from the programmed amounts in terms of dollars is converted at an exchange rate of Lek 144 per dollar, in order to ensure consistency with the budget projections.