Albania: IMF Executive Board Concludes First Post-Program Monitoring
IMF News, May 22, 2018
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- Published: May 22, 2018
Executive Board conclusion
- The Executive Board concluded the First Post-Program Monitoring review for Albania on May 18, 2018, and considered and endorsed the Staff Appraisal on a lapse-of-time basis.
- Albania’s capacity to repay the Fund is assessed as adequate based on a strong record of repaying the Fund, relative macroeconomic stability, and progress in reforms.
Economic overview and recent performance
- Real GDP growth: 3.8 percent (yoy) during 2017.
- Drivers of growth: strong domestic demand driven by a revival in construction, recovery in the labor market and household credit, and large energy-related FDI projects.
- Public debt to GDP: declined in 2017, but fiscal consolidation pace has slowed post-program with arrears accumulating.
- Current account deficit: narrowed to 6.9 percent of GDP in 2017, supported by tourism and other services exports.
- FX reserves: level remains comfortable.
- Inflation: low.
- Credit: credit growth is weak.
- Banking sector: banks are liquid and stable.
Risks and vulnerabilities
- Principal risks identified:
- High public debt.
- Non-performing loans (NPLs) in the financial sector.
- Weaknesses in public institutions and the judicial system.
- Potential slowdown in reforms or spillovers from external shocks that could undermine growth, confidence, and debt dynamics, creating financing pressures on the government.
- Upside opportunity:
- Opening of EU accession negotiations could lift reform implementation, leading to higher investment and GDP growth.
Key policy messages and recommendations
- General:
- Use the favorable economic environment to push structural reforms to lift potential growth and allow Albania to benefit from potential EU accession.
- Fiscal policy and debt management:
- Address fiscal risks from high public debt and related financing needs as a high priority.
- Require more fiscal adjustment, preferably in the near term.
- Public debt management should focus on lengthening the maturity of public debt and diversifying the investor base.
- Avoid risks from excessive non-concessional FX borrowing.
- Strengthen debt management capacity.
- Revenue and tax administration:
- Improve tax compliance and administration.
- Progress toward value-based property taxation is welcome, but implementation needs careful preparation.
- Consider additional revenue measures, including broadening the tax base.
- Refrain from lowering tax rates or granting any new tax exemptions or preferential tax treatments.
- Fiscal institutions and PPPs:
- Strengthen fiscal institutions and assessment of fiscal risks.
- Enhance the credibility of the medium-term budgetary framework.
- Prioritize public investment, and improve project appraisal and monitoring.
- MoF should enhance fiscal recording, and legal, financial and economic analysis of PPP projects and ensure proper implementation of the PPP framework.
- Carefully assess the impact of PPPs on the fiscal medium-term budget framework and debt sustainability.
- Arrears and commitment control:
- Tackle arrears, including in VAT refunds and unbudgeted investment projects.
- Improve the VAT refund process and strengthen commitment controls.
- Expand the Treasury’s IT system to local governments.
- Register all unbudgeted commitments and record unpaid bills.
- Use measures such as reverse VAT to limit refunds with caution.
- State-owned electricity sector:
- Continue governance reforms and financial restructuring of the state-owned electricity sector.
- Address arrears accumulation and intracompany debt.
- Back measures with acceleration of institutional and market design reforms.
- Monetary and exchange rate policy:
- Current monetary policy stance is appropriate; the policy rate is currently at historical low rate, consistent with low inflation and external conditions.
- Measures to reduce euroization and deepen domestic financial markets are welcome.
- The flexible exchange rate has been an important stabilizer.
- Bank of Albania has been building a comfortable buffer of foreign reserves to address external shocks.
- Financial sector and NPL resolution:
- Continue legislative and institutional measures to resolve high NPL ratios.
- Accelerate measures to address cumbersome and inefficient collateral execution and out-of-court restructuring frameworks.
- Further align financial sector regulation with EU standards and gradually converge with the Basel III framework.
- Impose capital requirements on a risk-based, bank-specific approach to tackle risks within certain banks.
- Continue targeted regulations addressing risks from related party transactions and cross-border flows.
- Finalize the crisis management framework for non-bank financial institutions to enhance systemic resilience and mitigate financial stability risk.
Selected economic indicators, 2013–2019 (selected entries and projections)
- Real GDP (percent):
- 2013: 1.0
- 2014: 1.8
- 2015: 2.2
- 2016: 3.4
- 2017: 3.8
- 2018 (proj.): 3.6
- 2019 (proj.): 3.7
- Consumer Price Index (avg.):
- 2013: 1.9
- 2014: 1.6
- 2015: 1.3
- 2016: 2.0
- 2017: 2.1
- 2018 (proj.): 2.6
- Current account balance (percent of GDP):
- 2013: -9.3
- 2014: -10.8
- 2015: -8.6
- 2016: -7.6
- 2017: -6.9
- 2018 (proj.): -6.8
- 2019 (proj.): -6.6
- Public debt (percent of GDP):
- 2013: 70.4
- 2014: 72.0
- 2015: 73.7
- 2016: 73.2
- 2017: 71.8
- 2018 (proj.): 72.4
- 2019 (proj.): 69.8
- National savings (percent of GDP):
- 2013: 17.7
- 2014: 15.9
- 2015: 16.9
- 2016: 16.7
- 2017: 15.6
- 2018 (proj.): 15.7
- Investment (Incl. inventories + stat. disc., percent of GDP):
- 2013: 27.9
- 2014: 26.7
- 2015: 25.5
- 2016: 24.3
- 2017: 22.8
- 2018 (proj.): 22.4
- 2019 (proj.): 22.3
- Revenues and grants (percent of GDP):
- 2013: 24.0
- 2014: 26.3
- 2015: 27.3
- 2016: 27.7
- 2017: 27.6
- 2018 (proj.): 27.6
- Expenditures (percent of GDP):
- 2013: 29.2
- 2014: 32.2
- 2015: 30.9
- 2016: 29.6
- 2017: 29.7
- 2018 (proj.): 29.9
- Overall balance (excluding arrears payment, percent of GDP):
- 2013: -5.2
- 2014: -5.9
- 2015: -4.6
- 2016: -2.3
- 2017: -2.0
- 2018 (proj.): -2.2
- Gross international reserves (in billions of Euros):
- 2013: 3.3
- Nominal GDP (in billions of lek):
- 2013: 1350
- 2014: 1395
- 2015: 1434
- 2016: 1475
- 2017: 1553
- 2018 (proj.): 1637
- 2019 (proj.): 1737
- Output gap (percent, - = gap):
- 2013: -0.9
- 2014: -1.5
- 2015: -1.8
- 2016: -0.7
- 2017: -0.3
IMF Press Release No. 18/188, May 22, 2018.
