IMF Staff Concludes a Staff Visit to Albania

IMF News, May 19, 2022

Source details

Mission dates: May 12–19 (staff visit).
Press Release No. 22/161; press release date: May 19, 2022.
IMF team led by Ms. Yan Sun.
Statement reflects views of IMF staff and does not necessarily represent views of the IMF’s Executive Board. This mission will not result in a Board discussion.

The Albanian economy faces headwinds from the economic fallout of the war in Ukraine, through sharply rising prices and tighter global financial conditions.
The war in Ukraine represents the third major shock hitting the Albanian economy in recent years.
Growth projection for 2022: 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.
Inflation 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.
External funding costs have risen considerably and may well be durably higher; the public sector will likely face durably higher external funding costs.

The 2022 budget (as revised in March) provides already ample space to support the people and the economy.
Any additional revenue beyond what is currently projected in the budget should be saved to rebuild room for policy maneuver.
The public sector must prepare to live within tighter external conditions; the public sector should contain additional temporary, targeted support and any potentially higher procurement or public work costs within the existing budget spending envelope through reprioritization.
A credible, revenue-based medium-term fiscal consolidation is 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.
Welcomes government commitment to current fiscal rules, including returning to at least a zero primary balance by 2024.
Work on preparing and implementing the Medium-Term Revenue Strategy (MTRS) should proceed.
Commends initiative, with IMF support, to strengthen the Income Tax Law aiming for simplification, more efficiency, and greater equity for taxpayers earning different types of income.
Revenue administration strengthening needs to continue without delays.
Reiterates advice against a possible tax amnesty given concerns about its impact on tax compliance as well as money laundering and governance risks.

Authorities have responded swiftly with some support measures that are targeted and timebound.
The authorities have steered clear of ad hoc tax cuts.
Given challenges faced by the transparency board that monitors prices of a few staple food products, IMF staff see merits in replacing it with temporary, well-targeted support to the poor and vulnerable to cushion them from the effects of rising prices.
Efforts should continue to strengthen the country’s social protection system, including widening its coverage to the poor and vulnerable in the informal sector.
Any temporary, targeted support to the poor and vulnerable should be accommodated within the existing 2022 budget spending envelope through reprioritization.

Global energy market upheavals 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.

Supports the Bank of Albania’s decision to continue with monetary policy normalization and notes 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.
Excessive delay in tightening may later warrant much higher increases in the policy rate to bring 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 is required to monitor the sensitivity of banks’ balance sheets to loans with variable interest rates and the repricing of government securities.
Commends the Bank of Albania’s ongoing efforts to enhance banks’ capital buffers.

IMF staff thanked the Albanian authorities and other counterparts for open and constructive discussions during the mission.

IMF Press Release No. 22/161 — May 19, 2022.

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