On July 1, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Second Post-Program Monitoring review for Albania and considered and endorsed the Staff Appraisal on a lapse-of-time basis. 1 Albania’s capacity to repay the Fund is adequate reflecting a strong record of repaying the Fund, relative macroeconomic stability, and progress in reforms.
Albania’s medium-term economic outlook is broadly favorable. In 2019, growth is expected to slow down to 3.5 percent, due to the base effect of the 2018 peak in power generation and the economic slowdown in Albania’s main partner countries. Over the medium-term, GDP growth is projected to converge to its 4 percent potential rate, as activity is expected to be driven by a pickup in EU growth, increasing labor market participation, a gradual strengthening of exports including tourism, and the investments needed to close Albania's large infrastructure gap. Inflation is expected to converge slowly towards its 3 percent target by 2021, as the output gap narrows and imported inflation from the euro area recovers. The current account deficit is projected to narrow further over the medium term, supported by strong export growth and planned fiscal consolidation. The level of FX reserves remains comfortable.
Despite the favorable environment and positive short-term outlook, risks and vulnerabilities remain. Albania is exposed to the increasing risks to growth in the EU, notably in its main trading partners. On the domestic front, the vulnerabilities are primarily in the public sector, arising from high public debt, increasing contingent liabilities, and weaknesses in public institutions and economic governance in general. Domestic growth vulnerabilities include demographic prospects and heavy dependence of growth on weather conditions.
Executive Board Assessment
Following strong growth last year, the baseline projections foresee an ongoing economic expansion. Furthermore, inflation remains well under control, and the current account is expected to improve further. However, more ambitious improvements in governance and anti-corruption efforts, skills formation and other aspects of the business environment will be needed to raise potential growth, and take advantage of the country’s favorable location and low labor costs.
As a small open economy, with limited economic diversification, Albania remains considerably exposed to external and domestic risks. The country is especially vulnerable to drought, population aging combined with the ongoing emigration of skilled workers, and spillovers from lower growth in key trading partners. Furthermore, as a result of still high public debt, relatively large financing needs, and rising contingent liabilities, severe adverse shocks to growth or a deterioration in regional financial conditions could quickly undermine Albania’s public balance sheet and impair its access to affordable financing.
At the same time, Albania’s flexible exchange rate and ample reserves offer important tools for absorbing shocks. Furthermore, the recent fiscal consolidation and the lengthening of the maturity of public debt have also been helpful. As a result, risks to Albania’s capacity to repay appear contained. Nonetheless, more is needed to limit risks related to the public finances.
It is critical to implement further fiscal adjustment, combined with improvements in the quality of budgetary policies. Accelerating the reduction in public debt over the medium term, will create space to absorb and offset adverse shocks through countercyclical fiscal policies. Given the need to improve Albania’s infrastructure and human development, fiscal consolidation should be underpinned by improvements in tax policy and tax administration that lead to higher revenues. Such reforms should be supported by a careful analysis of the revenue system and a medium-term strategy to enlarge the tax base and level the playing field for businesses.
The authorities’ ambition to address the buildup of fiscal arrears is most welcome. These arrears have undercut the business climate as well as trust in the government. Going forward, all validated new VAT refund requests should be honored without delay, and the existing arrears should be cleared as soon as feasible—even if, in the short term, this may raise the deficit (measured on a cash basis).
It will be important to put in place a more consistent framework for public investment management, and to limit the risks from PPPs and other contingent liabilities. The Ministry of Finance and Economy should exploit its new role as gatekeeper for new PPP projects to help ensure both value for money and the containment of risks. Furthermore, the proposed establishment of the AIC should be revisited, to make sure that--if such institution is created--it will act on a strictly commercial basis and without direct government interference or reliance on future budget support.
The energy sector needs to be put on a sound footing without delay. Given sector’s endemic financial weakness and accumulating arrears, financial restructuring should be undertaken without delay, combined with continued actions to liberalize the sector and unbundle its key players.
Debt management should reconcile the search for lower financing costs and longer maturities, with the need to support the development of a robust and liquid domestic debt market. The latter would help mobilize domestic savings and reduce currency and rollover risks. In this context, it will be important to resume the issuance of short-term T-bills.
Continued strong supervision will be important to ensure that the expected increase in bank lending does not weaken financial stability. The banking sector has experienced a large-scale consolidation, combined with a shift in ownership away from EU banks. Against this background, the BOA’s recent measures for further alignment with EU standards and the increased frequency of on-site inspections should be helpful, particularly to contain risks from large exposures and related-party lending. Further actions will be needed to address weaknesses in the AML/CFT framework.
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Albania: Selected Economic Indicators, 2015–2020 |
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2015 |
2016 |
2017 |
2018 |
2019 |
2020 |
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Proj. |
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|
Real sector |
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|
Real GDP |
2.2 |
3.3 |
3.8 |
4.1 |
3.5 |
4.0 |
|
|
Domestic demand contribution |
0.6 |
3.2 |
3.6 |
5.0 |
4.0 |
4.3 |
|
|
Consumption |
0.6 |
2.0 |
2.1 |
2.1 |
2.5 |
2.7 |
|
|
Investment (Incl. inventories and stat. disc) |
0.0 |
1.1 |
1.5 |
2.9 |
1.5 |
1.6 |
|
|
External demand contribution |
1.6 |
0.2 |
0.2 |
-1.0 |
-0.5 |
-0.3 |
|
|
Consumer Price Index (eop) |
2.0 |
2.2 |
1.8 |
1.8 |
2.2 |
2.6 |
|
|
Consumer Price Index (avg.) |
1.9 |
1.3 |
2.0 |
2.0 |
2.0 |
2.4 |
|
|
GDP deflator |
0.6 |
-0.6 |
1.5 |
0.7 |
2.0 |
2.4 |
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|
Saving-investment balance |
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Foreign savings |
8.6 |
7.6 |
7.5 |
6.8 |
6.6 |
6.4 |
|
|
National savings |
15.8 |
16.8 |
17.0 |
17.3 |
17.6 |
17.8 |
|
|
Public |
0.7 |
1.2 |
2.4 |
2.7 |
1.5 |
1.9 |
|
|
Private |
15.1 |
15.6 |
14.7 |
14.6 |
16.1 |
15.8 |
|
|
Investment (incl. Inventories and stat. disc.) |
24.4 |
24.4 |
24.5 |
24.2 |
24.2 |
24.2 |
|
|
Public |
5.3 |
5.1 |
5.5 |
5.6 |
5.5 |
5.7 |
|
|
Private |
19.2 |
19.3 |
19.0 |
18.6 |
18.6 |
18.5 |
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|
Fiscal sector |
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|
Total Revenues and grants |
26.3 |
27.4 |
27.7 |
27.6 |
27.2 |
27.4 |
|
|
Tax revenue |
23.7 |
24.9 |
25.7 |
25.8 |
25.0 |
25.2 |
|
|
Total Expenditure |
30.9 |
29.6 |
29.7 |
29.3 |
29.7 |
27.3 |
|
|
Primary |
28.2 |
27.2 |
27.7 |
27.0 |
27.7 |
27.3 |
|
|
Interest |
2.7 |
2.5 |
2.1 |
2.2 |
2.0 |
2.1 |
|
|
Overall balance 2/ |
-4.6 |
-2.3 |
-2.0 |
-1.6 |
-2.5 |
-2.0 |
|
|
Primary balance |
-1.9 |
0.2 |
0.1 |
0.6 |
-0.5 |
0.0 |
|
|
Financing |
4.6 |
2.3 |
2.0 |
1.6 |
2.5 |
2.0 |
|
|
of which : Domestic |
-1.3 |
0.9 |
-0.8 |
-1.3 |
1.2 |
0.2 |
|
|
of which : Foreign |
5.0 |
1.3 |
1.9 |
2.9 |
1.3 |
1.8 |
|
|
General Government Debt 1/ |
73.7 |
73.3 |
71.9 |
69.9 |
66.3 |
64.5 |
|
|
Domestic |
39.5 |
39.1 |
39.0 |
37.6 |
34.2 |
32.8 |
|
|
External |
34.2 |
34.3 |
32.9 |
32.4 |
32.0 |
31.7 |
|
|
Monetary indicators |
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|
Broad money growth |
1.8 |
3.9 |
0.3 |
-0.2 |
6.4 |
6.5 |
|
|
Private credit growth |
-2.8 |
0.4 |
-0.8 |
-0.9 |
5.0 |
5.7 |
|
|
Velocity (nominal GDP/broad money) |
1.2 |
1.2 |
1.2 |
1.3 |
1.3 |
1.3 |
|
|
External sector |
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|
Trade balance (goods and services) |
-17.3 |
-16.9 |
-15.1 |
-14.0 |
-13.6 |
-12.8 |
|
|
Current account balance |
-8.6 |
-7.6 |
-7.5 |
-6.8 |
-6.6 |
-6.4 |
|
|
Gross international reserves (billions of Euros) |
2.9 |
2.9 |
3.0 |
3.4 |
3.7 |
3.9 |
|
|
(In months of imports of goods and services) |
7.0 |
6.5 |
6.2 |
6.6 |
6.8 |
6.8 |
|
|
(Relative to external debt service) |
2.6 |
3.6 |
3.5 |
3.1 |
3.8 |
3.1 |
|
|
(In percent of broad money) |
32.5 |
31.5 |
31.4 |
33.2 |
34.0 |
33.8 |
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|
Memorandum items |
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|
Output Gap (percent) |
-1.8 |
-1.4 |
-0.7 |
-0.7 |
-0.5 |
-0.2 |
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Sources: Albanian authorities; and IMF staff estimates and projections. 1/ The stock of general government debt includes arrears from central and local government. 2/ The fiscal balance includes guarantees for new loans to the energy sector. |
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1 The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.
