Press Release: IMF Approves Three-Year ESAF Loan for Albania
IMF News, May 13, 1998
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- Published: May 13, 1998
Loan approval and financing details
- IMF approved a three-year loan for Albania under the Enhanced Structural Adjustment Facility (ESAF), equivalent to SDR 35.3 million (about US$47 million), to support the government’s 1998-2001 economic program.
- The first annual loan is equivalent to SDR 11.77 million (about US$16 million), available in two equal semiannual installments; the first installment is available immediately.
- Albania’s outstanding use of IMF financing currently totals SDR 39.9 million (about US$54 million).
- Albania joined the IMF on October 15, 1991, and its quota is SDR 35.3 million (about US$47 million).
Background and recent economic history
- Transition since 1991 produced dramatic swings:
- 1992: output dropped to one-half its 1989 level; inflation in triple digits; external current account deficit equivalent to almost two-thirds of GDP.
- 1993-95: GDP growth averaged near double digits; single-digit inflation; sharply reduced external imbalances.
- 1996: rapid growth supported more by activities related to financial pyramid schemes and election-driven loose fiscal policy.
- 1997: collapse of pyramid schemes triggered a deep economic and social crisis, bringing the economy to a standstill.
- Mid-1997 government adopted a two-stage strategy:
- First stage (supported under IMF post conflict emergency assistance): initiated macroeconomic stabilization, rebuilding institutional and administrative capacity, and restarting structural reforms; inflation fell faster than projected, growth resumed, and currency confidence increased.
- Second stage: comprehensive medium-term macroeconomic and structural program supported by the ESAF.
Medium-term strategy and the 1998/99 program objectives
- Main objectives over the three-year program:
- Achieve sustainable growth of 7-8 percent.
- Reduce inflation to about 3 percent by 2001 (levels of Albania’s main trading partners).
- Maintain international reserve cover at about 3¾ months of imports of goods and nonfactor services externally.
- Bring down the current account deficit to levels consistent with medium-term viability.
- Fiscal policy targets:
- Reduce the domestically financed deficit to about 6½ percent of GDP in 1998 from about 11 percent GDP in 1997.
- Gradual reduction to about 3 percent by 2001.
- Monetary policy stance:
- Support inflation targets through appropriate interest rate policy and judicious application of credit ceilings.
- Bank of Albania committed to maintaining minimum deposit rates at levels positive in real terms to encourage growth in lek deposits; scope later in 1998 to lower nominal rates as inflation falls and pressure to finance the budget deficit is reduced.
- Short-term 1998 targets and expectations:
- GDP growth targeted at 10 percent in 1998 following an estimated decline of 7.0 percent in 1997.
- Inflation anticipated to fall to 10 percent during 1998, from 42.1 percent during 1997.
- External current account deficit expected to be the equivalent of 13.8 percent of GDP in 1998, compared with 11.9 percent in 1997, reflecting a pick-up in imports for post-crisis investment and reconstruction.
- Exports and private remittances expected to recover more gradually.
- Availability of significant external budgetary support will soften the impact of fiscal tightening and allow temporary expansion of the social safety net.
- Resumption of investment projects, facilitated by a substantial increase in foreign aid, expected to result in a somewhat higher overall deficit in 1998.
Structural reforms (priorities and measures)
- Pyramid schemes:
- Government committed to resolving the pyramid scheme problem with specific measures to prevent recurrence.
- Foreign administrators appointed for all companies which operated schemes to accelerate liquidation of assets of the five remaining companies.
- An international accounting firm appointed as auditors to assist administrators.
- Banking sector reform:
- Privatize or liquidate state banks; limit lending by state banks in the meantime; place management under the control or supervision of competent advisors.
- Ultimate goal: create a banking system based on well-functioning and well-regulated private banks.
- A revised Banking System Law has been approved by the Council of Ministers; further legal/regulatory revisions and improvements to banking supervision planned.
- Other structural priorities:
- Enterprise privatization.
- Creation of a functioning market in agricultural land.
- Reform of public administration, including measures to combat corruption.
- Encouragement of remittances and transfers from Albanians living abroad.
- Major progress: establishment of an agricultural-land market with passage of a new law and regulations to ease registration and sale of agricultural land.
Addressing social needs and poverty alleviation
- Long-term: lasting alleviation of poverty requires sustained high growth driven by private sector development.
- Short-term measures enabled by external budgetary support:
- Temporary expansion of current social assistance scheme to help the sharply increased number of needy families.
- Provide employment through community works.
- Accelerated release of budgetary allocations.
- Develop guidelines, in cooperation with international agencies, to make greater use of foster care and home care for the elderly.
Risks and implementation challenges
- Principal risks:
- Security situation within the country and in the region, with implications for economic confidence and investment prospects.
- Steadfast implementation of structural measures is critical.
Albania: Selected Economic Indicators (as presented)
- Real GDP (Percent change):
- 1995: 8.9
- 1996: 9.1
- 1997*: -7.0
- 1998**: 10.0
- 1999**: 7.0
- 2000**: 7.5
- 2001**: 8.0
- Retail prices (during period) (Percent change):
- 1995: 6.0
- 1996: 17.4
- 1997*: 42.1
- 1998**: 5.0
- 1999**: 3.0
- Domestically financed deficit (Percent of GDP):
- 1995: 6.6
- 1996: 11.0
- 1997*: 10.9
- 1998**: 5.2
- 1999**: 4.2
- 2000**: 3.2
- Current account balance, excluding official transfers (deficit -) (Percent of GDP):
- 1995: -7.2
- 1996: -9.1
- 1997*: -11.9
- 1998**: -13.8
- 1999**: -11.2
- 2000**: -9.0
- 2001**: -7.4
- Gross international reserves (Months of imports of goods and nonfactor services):
- 1995: 3.4
- 1996: 3.1
- 1997*: 4.5
- 1998**: 3.8
- 1999**: 3.7
*Sources: Albanian authorities and IMF staff estimates and projections. Estimates marked with “*”. Projections marked with “**”.*
Press Release No. 98/18, May 13, 1998.