Albania: Staff Concluding Statement of the Second Post-Program Monitoring Mission
IMF News, May 6, 2019
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- Published: May 6, 2019
Mission visit and purpose
- An IMF mission, led by Mr. Jan Kees Martijn, visited Tirana during April 25-May 6, 2019 for the second Post-Program Monitoring (PPM) discussions.
- PPM is a regular surveillance tool for countries with IMF credit outstanding above 200 percent of quota and focuses on vulnerabilities and risks to repayment capacity.
- IMF credit outstanding stood at 2.8 percent of GDP at end-2018.
Macroeconomic outlook and monetary policy
- Economic outlook: broadly favorable, though growth is expected to moderate in 2019.
- Growth projections:
- 2019: 3.5 percent (projected slowdown owing to the base effect of record electricity production in 2018 and slowdown in partner countries).
- Medium-term: expected to remain close to 4 percent.
- Drivers of medium-term activity: pickup in EU growth, increasing labor market participation, gradual strengthening of exports including tourism, investments to close infrastructure gap.
- Inflation and monetary policy:
- Inflation remains well below its 3 percent target.
- Monetary policy stance should continue to be very accommodative.
- Inflation is expected to converge slowly towards its target as the output gap narrows and euro area inflation recovers.
Key external and domestic risks
- External: significant exposure to increasing risks to growth in the EU, notably in main trading partners.
- Domestic vulnerabilities concentrated in the public sector.
- Fiscal developments and risks:
- Fiscal deficit declined in 2018 but is projected to widen to 2.5 percent of GDP in 2019 (including guarantees for new loans to the energy sector of 0.4 percent of GDP).
- Widening driven in part by planned repayment of government arrears and by recent tax measures that erode the tax base and introduce preferential treatment (reduced VAT and corporate tax rates).
- Risks of further revenue shortfalls and expected losses in the energy sector due to lower hydropower production.
- Public debt: 69.9 percent of GDP (including arrears) at end-2018; projected to decline to 66.3 percent of GDP by the end of this year.
- Fiscal policy has little room to absorb or offset adverse shocks at the current level of public debt and deficit.
- Fiscal risks from increasing contingent liabilities, including those related to public-private partnerships (PPPs).
Fiscal policy priorities and recommendations
- Overall objective: contain fiscal risks and create fiscal buffers via further fiscal consolidation, sustainable revenue efforts, and stronger budgetary institutions.
- Specific recommendations:
- Use favorable environment to improve fiscal position by strengthening the revenue base.
- Front-loaded fiscal adjustment to bring the primary surplus to 1.5 percent of GDP by 2021 to build buffers and ensure faster convergence of debt towards the 45 percent objective in the organic budget law.
- Achieve adjustment through higher revenues rather than expenditure cuts, given infrastructure and human development needs.
- Strengthen the tax system by reversing measures that fragment and weaken the tax base and by leveling the playing field for businesses.
- Develop a medium-term revenue strategy covering tax policy and administration to build consensus on revenue goals and a comprehensive package of tax measures.
Public sector arrears and public investment management
- Urgent action needed to curtail persistent public sector arrears, which undermine business climate and trust.
- Recommendations on arrears and payments:
- Ensure full and timely payment of all validated new VAT refund requests from now on, disconnecting them from corresponding revenue flows.
- Authorities plan to repay outstanding stock of VAT refund arrears as soon as feasible (and for the most part within 2019).
- Strengthen commitment controls for investment projects to end government payment arrears, in particular by the road fund.
- Public investment and PPPs:
- Use recent amendments to the PPP law to limit PPP-related contingent liabilities and ensure more consistent public investment management.
- MOFE as gatekeeper for PPPs must have capacity to assess risks and costs, particularly at pre-feasibility stage, and access to all contractual information from line ministries (including for existing projects).
- Reverse fragmentation of decision making in public investment management to enhance cost-effectiveness.
- Continue urging abolition of unsolicited proposals for all PPPs.
Albania Investment Corporation (AIC)
- Strong advice to revisit recent proposals for establishing the AIC to avoid risks to the budget and integrity of public investment management.
- Concerns about the draft law: could allow government to direct individual investment decisions, making AIC an off-budget spending tool that erodes fiscal discipline and circumvents public investment processes.
- Recommended framework:
- Ensure the AIC operates on a commercial basis and at arm’s length from government.
- Law should affirm operational independence and independence in selecting individual investment projects.
- AIC should be subject to the Public Procurement Law.
Debt management
- Recommendation to improve debt management, including resuming issuance of short-term (three-months and six months) T-bills in line with the debt issuance strategy prepared with the World Bank.
- Rationale:
- Short-term instruments are necessary for cost-efficient treasury cashflow management, for commercial banks, for development of secondary and hedging markets, and for facilitating BOA liquidity management.
- Building a robust and liquid domestic debt market should be a priority to mobilize domestic savings and reduce currency and rollover risks.
- Critical to strengthen MOFE’s debt management capacity and ensure good coordination with the BOA.
Energy sector financial issues
- Energy sector is financially weak and struggling with endemic arrears; dependence on rainfall exacerbates vulnerability and creates budget risks.
- Recommendation: implement the restructuring plan for the sector prepared with World Bank advice to put the sector on a sustainable financial footing.
Financial sector and banking recommendations
- Banking sector: finishing a consolidation process and is well-capitalized and liquid.
- BOA actions welcomed: strengthening regulatory and supervisory framework, implementation of Basel standards, cleaning up bank balance sheets with reduction in NPLs.
- Remaining structural weaknesses:
- Credit environment issues undercut business climate (especially for SMEs) and hinder monetary policy transmission.
- Unlocking credit growth requires resolution of the stalemate with bailiffs, full implementation of the insolvency and resolution framework, and government measures to support further de-euroization.
- Supervisory recommendations:
- BOA has aligned regulations more closely with international standards, including on capital buffers and macroprudential indicators, and increased inspection and supervision intensity for banks with new shareholders.
- Other banks, including systemically important ones, are inspected on-site only once every two years; advice to increase frequency to once every year to better identify risks from large exposures and related-party lending.
AML/CFT and institutional governance
- Urgent continuation of reforms to address weaknesses in AML/CFT framework.
- Implement action plans to address deficiencies identified in the Moneyval evaluation report without delay.
Assessment of repayment risks and closing remarks
- Assessment: risks to Albania’s capacity to repay seem limited despite fairly high gross financing needs due to relatively short maturity of public debt.
- Debt service, including to the IMF, is expected to remain well within Albania’s capacity to repay.
- Albania’s strong payment record and macroeconomic stability suggest repayment risks are contained.
- Closing: thanks to the authorities and counterparts for excellent collaboration and hospitality.
IMF Staff Concluding Statement, May 6, 2019.
Content in this bundle
- SHQIPËRI: Deklaratë përmbyllëse e ekipit të Misionit të Dytë të Monitorimit Pas Programit