Albania: Staff Concluding Statement of the 2024 Article IV Mission
IMF News, November 26, 2024
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- Published: November 26, 2024
Mission summary and macroeconomic backdrop
- IMF mission led by Anke Weber conducted discussions for the 2024 Article IV Consultation with Albania during November 13-21.
- The Albanian economy has recently delivered a strong performance, now above its pre-pandemic trend, supported by booming tourism, prudent fiscal policies, proactive monetary policy, falling global commodity prices, and a steady appreciation of the lek.
- Structural challenges remain: GDP per capita is around a quarter of U.S. and EU-15 levels, with rapid aging, emigration, governance shortfalls, and institutional weaknesses constraining the business environment.
- Achieving sustainable and inclusive growth requires overcoming structural shortcomings while safeguarding macroeconomic gains.
Performance and outlook
- Real GDP growth:
- 2023: expansion of 3.9 percent.
- 2024 (IMF staff projection): 3.6 percent, driven by domestic consumption, tourism, and construction.
- 2025–2029 (IMF staff projection): around 3½ percent, sustained by domestic demand and tourism.
- Inflation:
- End-of-year inflation in 2024 expected at around 2 percent, below the Bank of Albania’s 3 percent target.
- A sustained return to target is not expected before 2026 due to inertia in the inflation process; base effects will temporarily push up inflation in the first half of 2025.
- Current account:
- Projected to reach 3.4 percent in 2024 and forecast to modestly widen over the medium term due to higher imports from large public investment projects.
- Risks:
- Broadly balanced. Downside: geopolitical tensions, global slowdown, commodity price spikes, weather shocks, weaker tourism demand, exchange rate depreciation, real estate downturn affecting financial/public sectors given sizeable FX-denominated debt. Upside: tourism outperformance and broad-based structural reforms in the context of EU accession (not part of IMF staff baseline).
Fiscal policy, revenue strategy, and fiscal risks
- 2024 fiscal performance:
- Primary surplus expected at around 0.5 percent of GDP in 2024, marginally higher than the 0.3 percent of GDP budget target.
- Public debt ratio expected at around 56 percent at end-2024.
- 2025 and medium-term fiscal stance:
- 2025 budget aims for a zero primary balance.
- IMF projects the primary balance to hover near zero in 2026-2029 as authorities continue to uphold fiscal rules.
- Public debt projected to decline to around 50 percent in 2029 and assessed sustainable over the medium term.
- IMF staff recommendation on fiscal effort:
- Modest primary surplus of around ¼ percent of GDP in 2025-29 to reduce gross financing needs and enhance resilience—requiring additional net fiscal measures of around 1 percent of GDP.
- Measures to include revenue administration and tax policy reforms, spending efficiency improvements (including digitalization), and strengthened public investment management.
- Continued strengthening of public debt management to lengthen maturities.
- Medium-Term Revenue Strategy (MTRS) and revenue measures:
- Authorities close to adopting MTRS; envisaged revenue increases of 2½ percent of GDP contingent on forceful implementation.
- Recommended actions: strengthened IT infrastructure, improved data utilization, enhanced staffing/capacity, rationalizing tax structure, reducing exemptions (especially for VAT), resuming streamlining for self-employed professionals, faster-than-planned removal of zero-tax rate on small businesses, and completing groundwork for a new property tax law (fiscal cadaster and property valuation).
- Long-term spending pressures:
- IMF staff estimates an increase in public spending of around 10 percentage points of GDP in the next 25 years, mainly from pension, healthcare, and climate adaptation.
- Recommended: labor market and pension reforms to strengthen workers’ coverage and participation; cautious approach to ad hoc pension bonuses; better-targeted social assistance; more ambitious long-term revenue reforms (e.g., addressing tax disparities such as in agriculture).
- Contingent liabilities and SOEs/PPPs:
- Long-standing reciprocal arrears and liabilities among largest SOEs; PPP assets highly concentrated in energy.
- Recommended: significantly strengthen central oversight and governance of SOEs and PPPs; integrate PPPs into regular budgetary processes; publish a robust standalone fiscal risk statement; gradually adjust electricity tariffs to reflect costs; boost Ministry of Finance capacity to assess SOE/municipal borrowing risks; develop capital market infrastructure for bond issuances.
Monetary policy and exchange rate
- Policy approach:
- Continue a data-dependent approach to monetary policy given uncertainty.
- Bank of Albania cut policy rate by 25 basis points in November; IMF staff judged the cut appropriate.
- Absent significant inflationary shocks, scope may exist for a further modest policy rate reduction in 2025 to reduce risk of de-anchoring inflation expectations and lessen exchange rate appreciation pressures.
- Exchange rate regime:
- Flexible exchange rate has served Albania well and should remain the main shock absorber.
- Sustained lek appreciation largely driven by fundamentals (tourism, productivity); consider allowing more flexible adjustment and maintain policy rate as primary tool.
- FX interventions: may be warranted when appreciation is driven by non-fundamental factors but should be limited in scale and consider costs/benefits of reserve accumulation, central bank balance sheet risks, and implications for monetary policy transmission and financial market development.
Financial sector resilience and supervision
- Banking sector soundness:
- Banking sector remains well-capitalized and liquid with average prudential ratios well above regulatory requirements, though scope exists to further strengthen some banks’ capital positions.
- Risks include banks’ large-borrower and sovereign exposures, rapid expansion of credit to real estate, continued price increases in real estate, and two-thirds of unhedged FX loans tied to real estate.
- Supervisory recommendations:
- Ensure strict compliance with capital requirements; consider temporary dividend suspensions and prepare capital conservation plans and restrictions if needed.
- Continue progress toward regulatory equivalence with the European Banking Authority to strengthen supervisory frameworks.
- Recent BoA proposed changes to non-bank regulations (consumer protection, microfinance lending) are important for integrity.
- Enhance data collection and risk monitoring of the non-bank sector (insurance, investment and pension funds); leverage the Financial Stability Advisory Group for interinstitutional cooperation.
- Macroprudential toolkit and market development:
- Consider introducing borrower-based measures, differentiating between domestic and FX activities, to mitigate real estate credit risks.
- Welcome increase in the countercyclical capital buffer and see benefits in moving to a positive neutral framework.
- Finalize a comprehensive methodology for the systemic risk buffer given sovereign concentration risks.
- Continue efforts to develop and deepen bond and money markets to reduce banks’ liquidity risks, including legal framework changes for repurchase agreements.
Structural reforms and EU accession-related priorities
- Productivity and growth drivers:
- Medium-term growth increasingly dependent on productivity gains; labor and total factor productivity remain well below EU levels despite recent increases.
- Maximizing gains from EU accession requires ambitious reforms to address productivity bottlenecks.
- Policy actions to lift productivity:
- Promote SME access to bank lending by reducing information asymmetries.
- Facilitate capital investment, technology adoption, R&D, and integration into global value chains.
- Create innovation networks across firms and research institutions.
- Update education and training programs to match labor market needs, enhance vocational training, advance the digital agenda, and boost labor force participation (e.g., expand access to childcare).
- Infrastructure and energy:
- Overcome infrastructure bottlenecks to improve connectivity; transport network still lags EU economies despite projects like a new airport and touristic port.
- Hydropower is a clean energy source but vulnerable to droughts; diversify into other renewable energy types with storage capacities for energy security.
- Ensure adequate budget resources and monitoring mechanisms for translating projects into better outcomes.
- Governance, rule of law, and AML/CFT:
- Imminent completion of vetting of judges and significant progress on AML/CFT reforms in line with FATF recommendations are important milestones.
- Recommended further reforms: reduce case backlogs, implement an electronic integrated case management system, fill critical court vacancies transparently and on merit, adopt the Intersectoral Anticorruption Strategy as planned, resource SPAK adequately.
- Swiftly implement the National Strategy for Money Laundering/Financing of Terrorism Prevention and mitigate risks identified in the 2023 National Risk Assessment.
- Leverage AML measures to address tax non-compliance and related crimes.
Concluding remarks
- The mission thanks Albanian authorities and counterparts for collaboration and constructive exchanges.
- Based on preliminary findings, IMF staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Source: IMF staff concluding statement for the 2024 Article IV Consultation with Albania, November 26, 2024.
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