IMF Executive Board Concludes 2022 Article IV Consultation with Albania

IMF News, December 9, 2022

Source details

Canonical URL: IMF Executive Board Concludes 2022 Article IV Consultation with Albania

Following a strong rebound in 2021, the Albanian economy has maintained positive momentum despite the shock to the global economy from Russia’s war against Ukraine.
Real GDP growth is expected to reach 3.7 percent in 2022, on the back of robust activity in tourism, real estate, and services.
Growth is expected to decelerate to about 2 percent in 2023, reflecting tighter financial conditions, the slowdown in Europe, and the withdrawal of policy support.
Headline inflation is expected to peak in the coming months and should start receding in 2023 before returning to the central bank’s target of 3 percent by mid-2024, as international commodity prices stabilize, fiscal and monetary policies tighten, and growth slows.

The outlook is subject to considerable uncertainty.
Risks to growth are tilted to the downside, while those to inflation are on the upside.
Key risks:
- Further increases in food and energy prices, especially if they trigger larger second-round effects and social unrest.
- Higher and more persistent inflation that could weigh on real income and weaken growth prospects.
- A more significant tightening in global financial conditions that could hamper Albania’s access to external market financing.
- Vulnerability to unfavorable weather conditions and a reversal in the rise of real estate prices.
Mitigants:
- Albania’s high level of FX reserves.
- Albania’s adequate level of international reserves.

General government debt is expected to further decline to just below 70 percent of GDP at end-2022, helped by continued economic growth and an expected smaller deficit relative to last year.
Absent new shocks, public debt is expected to remain on a downward path, reaching about 64 percent of GDP in 2027, but gross financing needs would remain sizable.
Directors welcomed the authorities’ plan to reach a primary balance in 2023 and stressed the need for a more ambitious medium-term fiscal consolidation, underpinned by a sound medium-term revenue strategy which should be finalized and implemented without further delay.
Recommendations and cautions:
- Fiscal support to the vulnerable should be temporary and targeted, fully leveraging the existing social protection framework.
- Step up efforts to enhance fiscal transparency and credibility, improve public financial management, and strengthen fiscal risk monitoring and management.
- Align public-private partnership and public investment management frameworks and fully integrate them into the budget cycle.
- Directors cautioned against the proposed tax amnesty given governance and money laundering risks.

Directors encouraged the Bank of Albania (BoA) to continue its data-driven monetary policy normalization, amid continued inflationary pressures, while preserving exchange rate flexibility.
Enhanced vigilance is important to safeguard financial stability given rapid credit growth and real estate-related activities.
Directors supported the BoA’s ongoing efforts to enhance financial regulation and supervision and boost capital buffers.
The presence of banks with significant shareholding by individuals and non-financial groups warrants heightened vigilance in supervision.
The financial system has weathered the consecutive shocks relatively well and credit flows have continued to the economy.

Advancing structural reforms will be critical in unlocking Albania’s growth potential.
Directors welcomed the opening of EU accession discussions which should contribute to reform progress.
Specific priorities:
- Sustained progress in judicial reforms and anticorruption.
- An expedited exit from FATF's grey list.
- Fighting informality to help rein in emigration pressures.
- Concerted adaptation efforts to address the macro-criticality of climate change within the budget framework.

Executive Directors commended the authorities for their decisive policy response to multiple shocks since 2019 and welcomed the continued economic recovery.
Noting that risks are tilted to the downside, Directors emphasized the need for prudent policy and vigilance to ensure macroeconomic stability and address vulnerabilities, while implementing reforms to promote sustainable, inclusive, and green growth and address governance weaknesses.
Directors agreed that Albania's capacity to repay the Fund is adequate and saw no need for an extension of the Post-Financing Assessment beyond February 2023.

Output
- Real GDP growth (%): 2019: 2.1; 2020: -3.5; 2021: 8.5; 2022: 3.7; 2023 Proj.: 2.2
- Output gap (%): 2019: -1.1; 2020: -2.9; 2021: 0.7; 2022: 1.1; 2023 Proj.: 0.0

Prices
- CPI inflation (%, average): 2019: 1.4; 2020: 1.6; 2021: 2.0; 2022: 7.0; 2023 Proj.: 5.4
- CPI inflation (%, end-period): 2019: 9.0; 2020: 3.9

General government finances
- Revenues (% GDP): 2019: 27.2; 2020: 25.9; 2021: 27.0; 2022: 27.6; 2023 Proj.: 27.?
- Expenditures (% GDP): 2019: 29.2; 2020: 32.6; 2021: 31.6; 2022: 30.9; 2023 Proj.: 30.3
- Fiscal balance (% GDP) 1/: 2019: -1.9; 2020: -6.7; 2021: -4.5; 2022: -3.3; 2023 Proj.: -2.7
- Primary balance (% GDP): 2019: 0.1; 2020: -4.6; 2021: -2.6; 2022: -1.3

Public debt (% GDP) 2/ 3/: 2019: 67.4; 2020: 75.9; 2021: 73.9; 2022: 68.5; 2023 Proj.: 67.9

Money and credit
- Broad money (% change): 2019: 4.3; 2020: 10.5; 2021: 8.6; 2022: 6.4; 2023 Proj.: 5.6
- Credit to the private sector (% change): 2019: 6.1; 2020: 8.9; 2021: 9.9; 2022: 5.7
- Policy rate (%, end-period): 2019: 1.0; 2020: 0.5; 2021: …

Balance of payments
- Current account (% GDP): 2019: -7.6; 2020: -8.7; 2021: -7.7; 2022: -7.8
- FDI (% GDP): 2019: -7.5; 2020: -6.4; 2021: -6.5
- Reserves (months of imports): 2019: 8.1; 2020: 7.2; 2021: 7.1
- External debt (% GDP): 2019: 60.0; 2020: 64.3; 2021: 63.1; 2022: 57.9

Notes included in the original reporting:
- 1/ The fiscal balance includes guarantees for new loans to the energy sector through 2019 and from 2021, and potential calls of COVID-19 related guarantees from 2022.
- 2/ Public debt refers to the general government and includes all public domestic and external guarantees for energy and non-energy sector debt as well as arrears from central and local government and VAT refund arrears.
- 3/ The 2021 SDR allocation equivalent at present to $170 million is recorded with the Bank of Albania and is used as a credit line until 2023 and for budget financing afterwards. Accordingly, public debt and the TSA account only include the SDR allocation starting 2024.

IMF Communications Department, Press Release No. 22/423, December 9, 2022.