May 6, 2019
PRESS OFFICER: Gediminas Vilkas
Phone: +1 202 623-7100Email: MEDIA@IMF.org
Albania’s medium-term economic outlook is broadly favorable, even though growth is expected to moderate in 2019. Maintaining the growth momentum over the medium term requires reforms to improve the business climate and reduce vulnerabilities. Key risks stem from high public debt, weaknesses in public finances and bottlenecks to financial intermediation. Policy priorities include further fiscal consolidation through well-designed tax policies, better public investment management, and prudent actions to support credit for private sector investment.
An International Monetary Fund (IMF) mission, led by Mr. Jan Kees Martijn, visited Tirana during April 25-May 6, 2019, for the second Post-Program Monitoring (PPM) discussions. PPM is a regular surveillance tool for countries with IMF credit outstanding above 200 percent of quota. PPM missions focus on vulnerabilities and risks to the repayment capacity to the IMF. At the end of the visit, the mission issued the following statement:
Risks to Albania’s capacity to repay seem limited. Although gross financing needs are fairly high due to the relatively short maturity of public debt, debt service, including to the IMF, is expected to remain well within Albania’s capacity to repay. IMF credit outstanding stood at 2.8 percent of GDP at end-2018. Albania’s strong payment record and macroeconomic stability also suggests that repayment risks are contained.
The economic outlook is broadly favorable. Growth is expected to moderate in 2019 but remain close to 4 percent over the medium-term. This year, growth is projected to slow to 3.5 percent, owing to the base effect of record electricity production in 2018 and the slowdown in partner countries. In the medium-term, activity is expected to be driven by a pickup in EU growth, increasing labor market participation, a gradual strengthening of exports including tourism, and the investments needed to close Albania’s large infrastructure gap. However, sustained development also hinges on improvements in economic governance, including in the rule of law and the fight against corruption. As inflation remains well below its 3 percent target, the monetary policy stance should continue to be very accommodative. Inflation is expected to converge slowly towards its target, as the output gap narrows and inflation in the euro area recovers.
However, there are important downside risks. Albania is significantly exposed to the increasing risks to growth in the EU, notably in its main trading partners. On the domestic front the vulnerabilities are mainly in the public sector. While the fiscal deficit declined in 2018, it is projected to widen to 2.5 percent of GDP in 2019 (including guarantees for new loans to the energy sector of 0.4 percent of GDP). This widening is driven in part by the planned repayment of government arrears which, by itself, is welcome. However, the deficit is also augmented by recent tax measures that erode the already narrow tax base, and introduce preferential treatment of additional sectors, including through reduced VAT and corporate tax rates. Moreover, there are risks of further revenue shortfalls, and expected losses in the energy sector due to lower hydropower production. Despite a decline in recent years, public debt continues to be high at 69.9 percent of GDP (including arrears) at end-2018, and it is projected to decline to 66.3 percent of GDP by the end of this year. At the current level of public debt and the deficit, fiscal policy has little room for absorbing or offsetting adverse shocks. Furthermore, there are fiscal risks from the increasing contingent liabilities, such as those related to public-private partnerships (PPPs).
Building on recent reforms to strengthen risk management and tax administration we recommend containing fiscal risks and creating fiscal buffers that require further fiscal consolidation via sustainable revenue efforts and stronger budgetary institutions. Specifically,
Further measures are also in order to contain the risks from the financial sector
The banking sector is finishing a consolidation process and is well-capitalized and liquid. We welcome the ongoing measures by the BOA to strengthen the regulatory and supervisory framework and implement Basel standards amidst the changes in bank ownership, and to continue cleaning up bank balance sheets with a reduction in NPLs.
However, structural weaknesses in credit environment undercut the business climate (especially for SMEs) and hinder the transmission of monetary policy. Unlocking credit growth would require an ultimate resolution to the stalemate with bailiffs, full implementation of the insolvency and resolution framework, and government measures to support further de-euroization.
The BOA has been very active in strengthening its supervisory and macroprudential tools. Regarding the latter, the BOA has aligned its regulations more closely with international standards, including on capital buffers and the development of a wide range of macroprudential indicators. The bank has also put in place more intensive inspection and supervision, both on-site and off-site, for banks with new shareholders. However, other banks, including systemically important ones, are inspected on-site only once every two years. We advise the BOA to increase the frequency of inspections to once every year to enhance its ability to identify risks stemming from large exposures and related-party lending in a more timely manner.
We also urge the authorities to continue reforms to address weaknesses in the AML/CFT framework , by implementing the action plans to address the deficiencies identified in the Moneyval evaluation report without delay.
Finally, I want to thank the authorities and all our other counterparts for the excellent collaboration and for their hospitality.
