Albania: Staff Concluding Statement of the 2022 Article IV Mission
IMF News, October 10, 2022
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- Published: October 10, 2022
Outlook and key macroeconomic projections
- Growth of 3.7 percent in 2022 driven by tourism, real estate, and services.
- Growth projected to slow to around 2 percent in 2023 due to tighter financial conditions, slowdown in Europe, and withdrawal of policy support.
- Inflation expected to peak in the coming months, begin to recede in 2023, and return to the Bank of Albania’s (BoA) target of 3 percent by mid-2024 as international commodity prices stabilize, fiscal and monetary policies tighten, and growth slows.
- Monetary policy rate assumptions: rise to 3-3.5 percent in 2022 and 4-4.5 percent in 2023.
- Public debt projected to decline further to about 68 percent of GDP in 2022.
- Outlook subject to considerable uncertainty with downside risks: further increases in international food and energy prices, higher and more persistent inflation, drastic tightening in global financial conditions, unfavorable weather, and reversal in real estate price rises.
Fiscal policy: priorities and specific targets
- Fiscal consolidation is vital to rebuild policy buffers and reduce demand pressure while providing targeted and temporary support to the vulnerable.
- Support for the July budget revision that provided targeted assistance and reduced the deficit target.
- Recommendation to aim for at least a zero primary balance in 2023, meeting the Organic Budget Law requirement one year ahead of time.
- Recommendation to reach a primary surplus of 1.5 percent GDP by 2024.
- Guidance if downside risks materialize: allow automatic stabilizers to operate and deploy further temporary, targeted support to the vulnerable.
- Urgent need to finalize and implement a sound Medium-Term Revenue Strategy (MTRS) to raise tax revenue (noted as among the lowest in percent of GDP in the region).
- Concerns reiterated about the proposed tax amnesty law due to money laundering and governance risks and adverse impact on tax compliance.
- Any higher-than-expected revenue should be saved for faster debt reduction.
Public finance management, public investment, and SOE reforms
- Strengthen efficiency and credibility of public finances to preserve market confidence and mitigate higher borrowing costs.
- Reforms needed to align Public Investment Management (PIM) and Public Private Partnership (PPP) processes, with full integration into the normal budget cycle.
- Strengthen Ministry of Finance and Economy’s (MOFE) capacity to be an effective gatekeeper in project selection, evaluation, and monitoring.
- Anticipation of the authorities’ third Public Finance Management (PFM) strategy to address incomplete reforms and setbacks in commitment controls and arrears prevention, and to incorporate green PFM practices.
- Welcome progress in enhancing coordination of cash and debt management; emphasize effective implementation of the latest debt management strategy.
- Call to step up monitoring, assessment, and management of fiscal risks and enhance capacity.
- All public projects should be subject to public investment and procurement frameworks; urge publication of procurement contracts related to pandemic and earthquake recovery spending, names of awarded companies, and their beneficial owners.
- Reiterate need to minimize use of normative acts to alter the budget.
Energy sector and fiscal risks
- Volatility in the global energy market underlines urgency of reforms to bring the electricity sector to financial viability and reduce fiscal risks.
- Broad-based subsidies should be removed as they disproportionately benefit better-off households and hinder price signals.
- Gradual tariff adjustments to cost recovery levels are critical and must be complemented with measures to support the vulnerable.
- Enhance electricity sector transparency and state-owned enterprises (SOEs) corporate governance.
Monetary policy guidance
- Support for BoA’s monetary policy normalization; monetary conditions remain accommodative as real policy rates are deeply negative.
- With upside risks to inflation, monetary tightening should be frontloaded and further interest rate increases are warranted.
- The BoA should be prepared to raise the policy rate above its estimated neutral rate if inflationary pressure does not abate; the pace and size of tightening should be well communicated.
- The exchange rate should remain flexible and act as a shock absorber; sizable exchange rate depreciations (appreciations) would require larger (smaller) monetary policy tightening.
- Pace and timing of tightening should consider evolving economic conditions: sustained higher global commodity prices may require stronger tightening; slower growth, faster fiscal consolidation, or stronger core inflation response could support more gradual tightening or an earlier pause.
Financial stability and banking sector recommendations
- Banking system has weathered consecutive shocks relatively well, but full impacts may emerge over time; banks are susceptible to credit, interest rate, and exchange rate risks.
- BoA should continue strengthening risk-based on-site and off-site inspections and complete focused asset quality reviews.
- Ongoing efforts to enhance bank capital buffers are welcome.
- Close monitoring and management needed for potential risks from robust credit growth, including rising FX lending.
- Enhance surveillance of real estate and construction sector impacts on financial stability; address significant data gaps.
- Implement insolvency and resolution frameworks swiftly, including out-of-court loan restructuring, to prepare for large increases in NPLs.
- Resolve long-standing impasse in bailiff reform.
- Improve supervision and regulation aligned with EU standards to better manage financial stability risks.
- Ensure market entrants have strong banking experience and meet fit and proper criteria on an ongoing basis (including significant shareholders, controllers, beneficial owners, and senior managers).
- BoA to implement enhanced bank licensing and supervisory framework; authorities to apply pertinent competition rules.
Governance, EU accession, and anti-corruption/financial integrity
- Progress noted in vetting of judges, judicial officials, and prosecutors; objective to complete by the December 2024 constitutional deadline.
- Measures underway to improve court efficiency and address shortages of qualified judges and prosecutors.
- Review of the Anticorruption Strategy completed; revised strategy and action plan expected by end of this year after public consultations.
- Progress on FATF action plan noted; need to expedite efforts to exit FATF’s enhanced monitoring (FATF's “grey listing”).
- Authorities encouraged to align any new policies with guidance issued by FATF and MONEYVAL.
Climate change, adaptation, and green fiscal practices
- Albania is vulnerable to climate change due to importance of agriculture, reliance on hydroelectricity, and transformation to a tourism-dependent economy.
- Adaptation should be integral to government policy and planning.
- Adoption of green PFM practices and the MTRS can help finance adaptation costs and meet Albania’s climate goal of becoming carbon neutral by 2050.
Closing remarks
- Prudent policy and vigilance are required to stem rising risks and entrench positive momentum.
- Authorities thanked for close collaboration and constructive exchange of views.
Source: Albania: Staff Concluding Statement of the 2022 Article IV Mission (October 10, 2022).
Content in this bundle
- Shqipëri: Deklaratë Përmbyllëse e Misionit të Nenit IV për vitin 2022