Albania: Staff Concluding Statement of the First Post-Program Monitoring Mission

IMF News, March 20, 2018

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IMF mission led by Ms. Anita Tuladhar visited Tirana during March 7-20, 2018, for the first Post-Program Monitoring (PPM) discussions.
PPM focuses on vulnerabilities and risks for member countries with substantial IMF credit outstanding following program expiration.
Concluding judgment: Albania is enjoying one of the fastest economic growth rates in the region; macroeconomic and political environment is stable. Policymakers should use favorable conditions to push reforms addressing high public debt, contingent liabilities, and non-performing loans (NPLs), and to strengthen medium-term growth potential amid high informality and weak rule of law.

GDP growth projected at an estimated 3.9 percent in 2017 and 3.7 percent in 2018.
Financing conditions: inflation and interest rates remain very low.
External and financial indicators:
- Foreign exchange reserves of the Bank of Albania (BoA) are comfortable (at more than 6 months of import coverage).
- Flows of foreign direct investment continue at a robust pace.
- Recovery remains creditless; banking sector is stable, liquid, and profitable.
Growth outlook: positive provided reform momentum picks up, improving confidence and creating favorable environment for new investment and growth.

External risks:
- Growth recovery in the EU is largely cyclical; medium-term outlook subdued due to unresolved crisis legacy issues, weak productivity growth, and demographic headwinds.
- Global risks: sudden financial market correction, political uncertainties, protectionist policies.
Domestic risks:
- Tapering of large infrastructure investments in the energy sector expected to drag down growth.
- High public debt and increasing contingent liabilities raise risk of fiscal slippages that could dampen confidence and lower private investment.
- Banking sector vulnerabilities: large NPLs, difficulties in collateral execution; more rapid deleveraging by EU-owned banks could lead to stress.
- Adverse weather could affect electricity generation, creating quasi-fiscal risks.
- Insufficient progress on structural reforms (energy, public financial management, judicial reforms) could undermine investor confidence and reduce donor and capital inflows.

Need for faster fiscal consolidation to create policy buffers given high public debt:
- Public debt at 71.2 percent of GDP at end-2017, including local and central government arrears of 1.8 percent of GDP.
- A more ambitious fiscal deficit target—consistent with an additional fiscal effort of around 1 percent of GDP over two years, compared to a constant general government deficit of 2 percent of GDP in the budget—would help achieve faster debt reduction.
Revenue strengthening is a key priority to lower deficits and create room for infrastructure and education spending.

Arrears control:
- Stronger enforcement of budgetary commitment controls is crucial to prevent buildup of arrears.
- Unfunded commitments in the medium-term budget and VAT refund delays led to accumulation of new arrears of around 0.9 percent of GDP in 2017 (of which, 0.7 percent of GDP in VAT refunds) that need rapid resolution.
State-owned electricity sector:
- Revitalize reforms to put companies on a financially sustainable footing.
- Tackle accumulation of arrears and losses, improve operational efficiency through stronger corporate governance, institutional and market design reforms, and better targeting of investment.

Albania’s gross financing needs, at around 21 percent of GDP, remain high.
Authorities’ plan to support secondary market development for the 5-year government bond market would help reduce rollover risk.
Eurobond issuances should aim to amortize debt in foreign exchange while being vigilant to risks posed by excessive reliance on non-concessional borrowing in foreign currency.
Debt management capacity at MOF requires further strengthening.
Close coordination between the MOF and BoA and the markets is needed, given high bank exposure to the public sector.

NPLs at 13.2 percent of loans at end-2017 have been declining due to write-offs and restructuring, but key reforms are pending:
- Accelerate reforms to collateral execution, including success fees for bailiffs and regulation of out-of-court agreements.
- Remain vigilant to risks related to large corporate exposures and growth in the construction sector.
De-euroization strategy recently launched to reduce indirect credit risks from sizable unhedged foreign exchange exposures; should be implemented gradually to mitigate risks of financial disintermediation.
Strengthen bank supervision and regulation, aligned with EU standards:
- Ongoing bank consolidation as EU-owned banks deleverage comes with governance risks.
- Ensure new market entrants meet fit and proper criteria and have solid banking experience.
- Strict monitoring of systemic banks to contain risks of large borrowers and related-party lending.
- BoA should continue aligning regulatory and supervisory framework with the EU and progressively converge towards implementation of Basel III.
- Albanian Financial Supervisory Authority should complete crisis management framework for investment funds, in coordination with BoA and MOF.

Faster growth to raise living standards and reduce poverty requires fundamental institutional reforms to attract higher investment:
- Main impediments: weak property rights and a corrupt, inefficient judiciary.
- Additional constraints: lack of infrastructure connectivity, high informality, difficulty in accessing finance, and weak human capital.
- High emigration exacerbates growth challenges.
Implement reforms to improve investment climate, encourage growth, and increase job opportunities to set foundation for resilient growth and further EU integration.

IMF mission thanks the authorities and interlocutors for cooperation, open and constructive discussions, and warm hospitality.