Press Release No. 22/161

Washington, DC: An International Monetary Fund (IMF) team, led by Ms. Yan Sun, conducted a staff visit in Albania during May 12–19. At the conclusion of the mission, Ms. Sun issued the following statement:

“The sharp increase in food and energy prices as well as rising external funding costs following the war in Ukraine present the third major shock hitting the Albanian economy in recent years. Growth in 2022 is projected at about 3 percent, supported by tourism and construction but moderated by the impact of rising prices. Inflation has increased to considerably above the 3 percent target of the central bank and is becoming broad-based. It is expected to remain at a high level in the coming months—driven by import prices—before falling back to the target towards early 2024, reflecting the impact of monetary policy tightening.

“The authorities have responded swiftly to the latest shock, with some of the support measures targeted and timebound. They have taken the right decision to steer clear of ad hoc tax cuts, which tend to benefit disproportionately those who are better off, can distort price signals, and are costly and hard to reverse. Given the challenges faced by the transparency board that monitors prices of a few staple food products, we see merits in replacing it with temporary, well-targeted support to the poor and vulnerable to cushion them from the effects of rising prices. In this regard, efforts should continue to strengthen the country’s social protection system, including widening its coverage to the poor and vulnerable in the informal sector.

“The 2022 budget (as revised in March) provides already ample space to support the people and the economy. Therefore, any additional revenue beyond what is currently projected in the budget should be saved to rebuild room for policy maneuver. This is critical, as external funding costs have risen considerably and may well be durably higher. The public sector must therefore prepare to live within tighter external conditions. The additional temporary, targeted support discussed above, and any potentially higher procurement or public work costs given rising prices should be contained within the existing budget spending envelope through reprioritization.

“A credible, revenue-based medium-term fiscal consolidation is now even more crucial to rebuild fiscal policy buffers that have been largely depleted. Public debt and, especially, gross financing requirement must be brought down while the economy continues to post good growth. Accordingly, we welcome the government’s strong commitment to the current fiscal rules, including returning to at least a zero primary balance by 2024. In this context, the work on preparing and implementing the Medium-Term Revenue Strategy (MTRS) should proceed. We commend the government’s initiative, with IMF support, to strengthen the Income Tax Law with a view to achieving simplification, more efficiency, and greater equity for taxpayers earning different types of income. The government’s efforts to strengthen revenue administration need to continue without delays. We reiterate our advice against a possible tax amnesty given concerns about its impact on tax compliance as well as money laundering and governance risks.

“The upheavals in the global energy markets have further aggravated the fiscal burden stemming from the electricity sector and underlined the urgency of decisive reforms to restore the financial viability of the state-owned enterprises. Gradual tariff adjustments are needed and should be complemented with measures that support the poor and vulnerable.

“We support the Bank of Albania’s decision to continue with monetary policy normalization and note that the policy stance remains accommodative despite the March policy rate increase. Further policy rate hikes are warranted to contain domestic inflationary pressures and steer inflation expectations back toward the target. Vigilance is required, as excessive delay in tightening may later warrant much higher increases in the policy rate to bring the inflation back to the target. The strategy governing the pace and size of tightening should be well communicated to maintain the credibility of the central bank and anchor inflation expectations.

The financial system has so far weathered the recent shocks well, supported by the Bank of Albania’s persistence in strengthening regulatory and supervisory frameworks. As monetary conditions tighten, continued vigilance will be key to monitor the sensitivity of banks’ balance sheets to loans with variable interest rates and the repricing of government securities. We commend the Bank of Albania’s ongoing efforts to enhance banks’ capital buffers.

“We would like to thank the Albanian authorities and our other counterparts for the open and constructive discussions during this mission.”